chapter Twenty-Six
Business Cycles, Unemployment, and Inflation CHAPTER OVERVIEW
This chapter discusses the business cycle, unemployment, and inflation. It sets the stage for the analytical presentation in later chapters.
The business cycle is introduced in historical perspective and is presented in stylized form (Figure 26.1). While hinting at various business cycle theories, the authors stress the general belief that changes in aggregate spending, especially durable goods and investment spending, are the immediate cause of economic instability. Non-cyclical fluctuations are also treated briefly before the analysis of unemployment and inflation.
In the section on unemployment, the various types of unemployment—frictional, structural, and cyclical—are described. Then the problems involved in measuring unemployment and in defining the full‑employment unemployment rate are considered. The economic and non-economic costs of unemployment are presented, and finally, Global Perspective 7.2 gives an international comparison of unemployment rates.
Inflation is accorded a rather detailed treatment from both a cause and an effect perspective. International comparisons of inflation rates in the post-1992 period are given in Global Perspective 7.2. Demand‑pull and cost‑push inflation are described. Considerable emphasis is placed on the fact that the redistributive effects of inflation will differ, depending on whether inflation is anticipated or unanticipated. The chapter ends with historical cases of hyperinflation to remind students that inflationary fears have some basis in fact.
*Concept Illustration … Types of Unemployment*

Imagine a fictitious country named Miniature that has a stable population of 120 people, of which 100 are in the labor force. Of these 100 people, 95 are employed and 5 are unemployed. That means Miniature’s unemployment rate is 5 percent (= 5/100).

Suppose we could take a group photo of the unemployed workers each month so as to obtain a continuing record of their monthly numbers and reveal whom they are. By comparing the monthly photos over long periods, we could sort out the types of unemployment occurring in Miniature.

Suppose that in a typical month there are 5 people in the photo. Also, suppose that 4 of these people are never the same individuals who were in the photo the previous month and the other person never shows up in the photo for more than two or three consecutive months.
We can reasonably conclude that Miniature is experiencing *frictional unemployment *and *structural unemployment*. The frictionally unemployed workers are quickly finding jobs, and after retraining or relocation, the structurally unemployed workers are obtaining new jobs within a few months. Taking the places of these formerly unemployed persons are newly unemployed people who are looking for new jobs, waiting for future jobs, retraining, or relocating. Five percent of the labor force is unemployed each month, but nobody is unemployed for any substantial length of time. Miniature is not suffering an “unemployment problem.”

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