Transcript Review question 1, p.184

Tutorial 4
• Review question 1, p.184
• Review question 5, p.184
• Review question 7, p.184
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-1
Review question 1, p.184
• Define contraction and expansion. What are the
beginning and ending points of a recession called? In
post-war Australia, which have been longer on
average—contraction or expansion?
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-2
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-3
• Contraction: A period in which the economy is
moving from a peak to a trough.
• Expansion: A period in which the economy is moving
from a trough to a peak.
• The beginning of a contraction is called the peak (the
point at which economic activity reaches its highest
point and begins to decline)
• The end point of a contraction (and the beginning of
the expansion) is called a trough.
• In post-war Australia, expansions have been
considerably longer than recessions on average.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-4
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-5
The Business Cycle in Australia,
1960 - 2006
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-6
Review question 5, p.184
• Define potential output. Is it possible for an economy
to produce an amount greater than potential output?
Explain.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-7
• Potential output, or potential GDP, is the amount of
output the economy can produce when it is using its
inputs, such as capital and labour, at normal rates.
• Inputs can be used at greater than normal rates for a
time (for example, workers can work overtime and
machines can be used at night or on weekends),
• Therefore, it is possible for the economy to produce
an amount exceeding potential output.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-8
Review question 7, p.184
• True or false: When output equals potential output,
the unemployment rate is zero. Explain.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-9
• False.
• When output = potential output, the unemployment
rate = the natural unemployment rate.
• Cyclical unemployment is zero when output equals
potential output, but frictional and structural
unemployment still exist.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-10
• Natural unemployment rate = frictional plus structural
unemployment.
– Frictional unemployment related to job search
– Structural unemployment related to mismatch
• Natural unemployment exists independently of
whether the economy is in expansion or contraction.
• Cyclical unemployment is the extra unemployment
that occurs during a recession.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank
Slides prepared by Anne Gleeson, Flinders University
6-11