Question

• While over the long run, the economy grows about 2 to 3% per year on average, over the shorter term, the economy goes through business cycles. Think about the growth rate of GDP, the inflation rate, and the unemployment rate over the last 4 quarters including the Covid-19 period until July. Once you’ve looked at the data, can you draw conclusions about the state of the economy? Would you describe the economy as booming, recovering, or in a recession? Why? Which curve do you think caused the change? Explain your reasoning.

Answer 1

1- According to economists, there can be No trade - off between inflation and unemployment in the long run. Diseases in unemployment can lead to increases in inflation, but only in the short run .In the long run, inflation and unemployment are unrelated.

2- The relationship between inflation rates and unemployment rates is inverse. Graphically, this means the short - run .

3-Example-

The Phillips curve shows the inverse relationship between inflation and unemployment: as unemployment decreases, inflation increases.

4- Phillips curve - A graph that shows the inverse relationship between the rate of unemployment and the rate of inflation in an economy.

5-Stagflation- Inflation accompanied by stagnant growth, unemployment, or recession.

6- The Phillips curve relates the rate of inflation with the rate of unemployment.

7-The Phillips curve that unemployment and inflation are inversely related: as level of unemployment decreases, inflation increases. The relationship, However, is not linear.

8-Graphically , the short- run Phillips curve traces an L - shape when the unemployment rate is on the x- axis and the inflation rate is on the y- axis.

9-Theoretical Philips Curve- The Phillips curve shows the inverse trade- off between inflation and unemployment.

-10-As one increases, the other must decrease.In this image, an economy can either experience 3% unemployment at the cost of 6% of inflation, or increase unemployment to 5% to bring down the inflation levels to 2% .

11-Technological advances and new product developments can expert positive influences on economic growth.

12-Increase in demand from foreign markets can lead to higher export sales.

13-In any and all of these cases, the influx of income, if big enough, causes an increase in the economic growth rate.

14-Due to Covid -19, Recessions are visible in industrial production, employment, real income, and wholesale- retail trade. The working definition of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP)

15-Although the National Bureau of Economic research does not necessarily need to see this occur to call a recession, and uses more frequent reported monthly data to make its decision, so quarterly declines in gdp do not always align with the decision to declare a recession.

16--During business cycle contractions the unemployment rate arises and during expansions the unemployment rate falls.

17-The low point in the unemployment rate usually occurs just before the peak. The high point usually occurs just after the trough.

18-The four stages of the economic cycle are also referred to as the business cycle.

-These four stages -

- Expansion

- Peak

- Contraction

- Trough.

-During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases, and inflationary pressures build.

19-For the economy, a slower increase in the population raises concerns about American competitiveness. But it could actually be a good thing. That may curtail the rising US federal debt, which many think will soon cause interest rates to jump and hold down US GDP growth.