Question

Define and briefly explain the significance of each of the following terms. a. unemployment rate b. crowding-out effect c. business cycle d. inflation rate e. multiplier

Answer 1

a. Unemployment rate is a significant concept related to an economy. This unemployment rate can be defined from various ground. Broadly we can say labour force which are able to work but do not getting their job is unemployed. So unemployment rate will be total unemployed person divided by total labour force. This unemployment rate in the economy actually measures how the economy absorbing the labour force in their system. If unemployment rate is very high than the natural level then it will be problem for the economy. There are various kinds of unemployment like cyclical unemployment, frictional unemployment, structural unemployment etc.

b. Crowding out effect is a situation when government take expansionary fiscal policy but this expansionary fiscal policy are not fully effective because the expansionary policy of government leads to rise in interest rate this rise in interest rate reduces the investment. So in one hand G is rising but on the other hand investment (I) is falling. So overall rise in output will be less than expected because it is causing fall in investment through rise in interest rate.

で77、 LM Y る

c. Business cycle is basically fluctuations of economic activity over a time period. Business cycle is fluctuations of some key economic variables over a time period. The business cycle is related with ups and downs of the economy. There are some stages of business cycle and these are Expansion, Peak, Recession, Trough. These are cyclically happens in the economy.

tim

d. Inflation is a situation when there is continuous rise in price level and inflation rate is rise in price level over its base period. It is measured by consumer price index or in some cases by wholesale price index. Inflation rate is = [( CPI of current period - CPI of base period)/ CPI of base period].

e. Multiplier is a situation when there is small change in one component causes larger change in output. It means it is a situation where we get larger effect. If government expenditure rises by 200 but output rises by 1000 , then it is a multiplier effect. Expenditure multiplier can be denoted by 1/1-MPC. The multiplier effect we can get in various situations. Whenever there is a effect due to small change then we may get multiplier effect.