question
What are key variables used to determine stage of business cycle?
answer
Real GDP and rates of unemployment.
question
Business cycle phases
answer
Expansion:
- real GDP increasing
Peak:
- real GDP stops increasing and begins decreasing
Contraction/Recession:
- real GDP is decreasing
Trough:
- real GDP stops decreasing and begins increasing
- real GDP increasing
Peak:
- real GDP stops increasing and begins decreasing
Contraction/Recession:
- real GDP is decreasing
Trough:
- real GDP stops decreasing and begins increasing
question
What does an expansion feature?
answer
- GDP growth rate increases.
- unemployment rate decreases as hiring accelerates.
- investment increases in producers' equipment and home construction.
- inflation rate may increase.
- imports increase as domestic income growth accelerates.
- unemployment rate decreases as hiring accelerates.
- investment increases in producers' equipment and home construction.
- inflation rate may increase.
- imports increase as domestic income growth accelerates.
question
As an expansion approaches its peak..
answer
the rates of increase in spending, investment, and employment slow but remains positive, while inflation accelerates
question
In a contraction..
answer
- GDP growth rate negative.
- hours worked decreased, unemployment rate increases.
- consumer spending, home construction, and business investment decline.
- inflation rate decreases with a lag.
- imports decrease as domestic income growth slows.
- hours worked decreased, unemployment rate increases.
- consumer spending, home construction, and business investment decline.
- inflation rate decreases with a lag.
- imports decrease as domestic income growth slows.
question
When the contraction reaches a trough and economy begins a new expansion..
answer
economic growth becomes positive again and inflation is typically moderate, but employment growth may not start to increase until after the expansion has taken hold convincingly.
question
What typically signifies an expansion or contraction?
answer
Two consecutive quarters of growth/decline real GDP.
question
What type of economies do business cycles apply to?
answer
To economies that consist mainly of businesses.
- for economies that are mostly subsistence agriculture or dominated by state planning, fluctuations in activity are not really business cycles.
- for economies that are mostly subsistence agriculture or dominated by state planning, fluctuations in activity are not really business cycles.
question
Normal level of inventory-sales ratio in times of steady economic growth?
answer
Trends toward a normal level.
question
As an expansion nears a peak, what happens to inventory-sales ratio?
answer
Increases above normal level.
- firms decrease production, this leads to subsequent contractions.
- firms decrease production, this leads to subsequent contractions.
question
GDP analysis and inventory-sales ratio
answer
an increase in inventories is counted in GDP as economic output.
- analyst who looks only at GDP growth could see economic strength rather than beginning of weakness.
Opposite occurs when economy reaches trough.
- analyst who looks only at GDP growth could see economic strength rather than beginning of weakness.
Opposite occurs when economy reaches trough.
question
When will companies hire/fire workers?
answer
Only when expansion/contraction appears likely to persist.
- adjust overtime, etc before that.
- adjust overtime, etc before that.
question
how firms alter production levels to changing circumstances
answer
would be costly to adjust levels by frequently buying/selling equipment
- as expansion persists, firms can increase production capacity by investing in more equipment.
- during contractions, firms can reduce physical capacity by spending less on maintenance/delaying replacement.
- as expansion persists, firms can increase production capacity by investing in more equipment.
- during contractions, firms can reduce physical capacity by spending less on maintenance/delaying replacement.
question
Important determinants of the level of economic activity in the housing sector
answer
1) Mortgage Rates:
- lower interest rates increase home buying and construction.
2) housing costs relative to income:
- when incomes are cyclically high relative to home costs, home buying and construction tends to increase. Housing activity can decrease even when incomes are rising late in a cycle if home prices are rising faster than incomes, leading to decreases in purchase and construction activity in the housing sector.
3) Speculative activity:
- rising home prices can lead to purchases based on expectations of further gains. Higher prices led to excess building. This resulted in falling prices that decreased or eliminated speculative demanded and led to dramatic decreases in housing activity overall.
4) demographic factors
- proportion of population 25-40 is positively related to activity in the housing sector.
- lower interest rates increase home buying and construction.
2) housing costs relative to income:
- when incomes are cyclically high relative to home costs, home buying and construction tends to increase. Housing activity can decrease even when incomes are rising late in a cycle if home prices are rising faster than incomes, leading to decreases in purchase and construction activity in the housing sector.
3) Speculative activity:
- rising home prices can lead to purchases based on expectations of further gains. Higher prices led to excess building. This resulted in falling prices that decreased or eliminated speculative demanded and led to dramatic decreases in housing activity overall.
4) demographic factors
- proportion of population 25-40 is positively related to activity in the housing sector.
question
Trough characteristics
answer
- GDP growth rate changes from negative to positive
- high unemployment rate, increasing use of overtime and temporary workers.
- spending on consumer durable goods and housing may increase.
- moderate or decreasing inflation rate.
- high unemployment rate, increasing use of overtime and temporary workers.
- spending on consumer durable goods and housing may increase.
- moderate or decreasing inflation rate.
question
Peak characteristics
answer
- GDP growth rate decreases.
- unemployment rate decreases but hiring slows.
- consumer spending and business investment grow at slower rate.
- inflation rate increases.
- unemployment rate decreases but hiring slows.
- consumer spending and business investment grow at slower rate.
- inflation rate increases.
question
Neoclassical school believe
answer
- shifts in both AD and AS are primarily driven by change in technology over time.
- also believe economy has a strong tendency toward full-employment equilibrium, as recession puts downward pressure on the money wage rate, or as over-employment puts upward pressure on money-wage rate.
- business cycles result from temporary deviations from long-run equilibrium.
- also believe economy has a strong tendency toward full-employment equilibrium, as recession puts downward pressure on the money wage rate, or as over-employment puts upward pressure on money-wage rate.
- business cycles result from temporary deviations from long-run equilibrium.
question
What does the Great Depression do to Neoclassical school?
answer
Does not support it.
- US economy operated significantly below full-employment levels for many years.
- also, business cycles in general have been more severe and more prolonged than neoclassical model would suggest.
- US economy operated significantly below full-employment levels for many years.
- also, business cycles in general have been more severe and more prolonged than neoclassical model would suggest.
question
What did Keynes believe were primary cause of business cycles?
answer
shifts in aggregate demand due to expectations.
question
Keynesian School
answer
believes that these fluctuations are primarily due to swings in the level of optimism of those who run businesses.
- they overinvest and overproduce when they are too optimistic about future growth and they underinvest and underproduce when they are too pessimistic about future growth in potential GDP.
- they overinvest and overproduce when they are too optimistic about future growth and they underinvest and underproduce when they are too pessimistic about future growth in potential GDP.
question
How do Keynesians argue wages?
answer
They are 'downward sticky,' reducing the ability of a decrease in money wages to increase short-run aggregate supply and move the economy from recession back towards full employment.
- they argue to increase aggregate demand directly, through monetary policy (increase money supply) or through fiscal policy (increase government spending, decrease taxes).
- they argue to increase aggregate demand directly, through monetary policy (increase money supply) or through fiscal policy (increase government spending, decrease taxes).
question
What did New Keynesian School add?
answer
The assertion that prices of productive inputs other than labour are also 'downward sticky,' presenting additional barriers to the restoration of full-employment equilibrium.
question
Monetarist School
answer
Believe variations in aggregate demand that cause business cycles are due to variation in the rate of growth of the money supply, likely from inappropriate decisions by the monetary authorities.
question
How do Monetarists believe recession can be caused?
answer
external shocks or by inappropriate decreases in the money supply.
- believe central bank should follow a policy of stable and predictable increases in the money supply.
- believe central bank should follow a policy of stable and predictable increases in the money supply.
question
Austrian School
answer
believe business cycles are caused by government intervention in the economy.
- when govts force interest rates down to artificially low levels, firms invest too much capital in long-term and speculative lines of production compared to actual consumer demand. When these investments turn out poorly. firms decrease output in these lines, and this causes a contraction.
- when govts force interest rates down to artificially low levels, firms invest too much capital in long-term and speculative lines of production compared to actual consumer demand. When these investments turn out poorly. firms decrease output in these lines, and this causes a contraction.
question
What did New Classical School introduce?
answer
Real Business Cycle Theory
- emphasizes the effect of real economic variables such as changes in technology and external shocks, as opposed to monetary variables, as the cause of business cycles.
- emphasizes the effect of real economic variables such as changes in technology and external shocks, as opposed to monetary variables, as the cause of business cycles.
question
What did Real Business Cycle Theory apply?
answer
utility theory to macroeconomics.
- based on a model in which individuals and firms maximize expected utility, New Classical economists argue that policymakers should not try to counteract business cycles because expansions and contractions are efficient market response to real external shocks.
- based on a model in which individuals and firms maximize expected utility, New Classical economists argue that policymakers should not try to counteract business cycles because expansions and contractions are efficient market response to real external shocks.
question
Categories of Unemployment
answer
1) Frictional:
- results from time lag necessary to match employees who seek work with employers needing their skills.
- always with us as employers contract or expand their businesses.
2) Structural:
- caused by long-run changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified.
3) Cyclical:
- caused by changes in general level of economic activity.
- results from time lag necessary to match employees who seek work with employers needing their skills.
- always with us as employers contract or expand their businesses.
2) Structural:
- caused by long-run changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified.
3) Cyclical:
- caused by changes in general level of economic activity.
question
How does structural unemployment differ from frictional?
answer
In structural, the unemployed workers do not currently have the skills needed to perform the jobs that are available to them.
question
When is cyclical unemployment positive?
answer
When the economy is operating at less than full capacity and can be negative when an expansion leads to employment temporarily over the full employment level.
question
What do you have to be to be considered unemployed?
answer
Actively searching for work.
question
Unemployment rate
answer
percentage of people in the labour force who are unemployed.
question
Labour force
answer
includes all people who are either employed or unemployed.
question
People who choose not to be in the labour force....
answer
are voluntarily unemployed and they are not included in the calculation of the unemployment rate.
question
Underemployed
answer
employed part time but would prefer to work full time or is employed at a job they are over-qualified for.
question
Participation ratio
answer
the percentage of the working-age population who are either employed or actively seeking employment.
question
Discouraged workers
answer
those who are available for work but are neither employed not actively seeking employment.
question
What can cause short-term fluctuations in participation ratio?
answer
Changes in number of discouraged workers.
question
When is participation rate higher?
answer
When economy expands.
question
What kind of indicator of the business cycle is the unemployment rate?
answer
A lagging indicator
- caused by movement of discouraged workers out of and back into the labour force.
- early in an expansion when hiring prospects begin to improve, the number of discouraged workers who re-enter the labour force is greater than the number hired immediately. This causes unemployment rate to increase even though employment is expanding.
- caused by movement of discouraged workers out of and back into the labour force.
- early in an expansion when hiring prospects begin to improve, the number of discouraged workers who re-enter the labour force is greater than the number hired immediately. This causes unemployment rate to increase even though employment is expanding.
question
What measure declines early in contract and increases quickly in expansion?
answer
Productivity, or output per hour worked.
question
Thing to remember about rising price levels and inflation?
answer
needs to be constant rising price level, a single jump does not constitute inflation/ one certain good or sector has increasing prices.
question
Does inflation favour lenders or borrowers?
answer
Borrowers.
question
Disinflation
answer
inflation rate that is decreasing over time but remains greater than zero.
question
Price Index
answer
Measures the average price for a defined basket of goods and services.
question
CPI formula
answer
CPI = (cost of basket at current prices/cost of basket at base year prices) * 100
question
Analysts who look for emerging trends in consumer prices are often interested in?
answer
Prices of goods in process.
question
Headline inflation
answer
price indexes for all goods
question
core inflation
answer
price indexes that exclude food and energy as these prices are typically more volatile than for other goods.
- core is sometimes more useful for measuring underlying trend in prices.
- core is sometimes more useful for measuring underlying trend in prices.
question
Laspeyres Index
answer
uses a constant basked of goods and services.
question
What factors cause a Laspeyres index of consumer prices to be biased upward as a measure of the cost of living?
answer
1) new goods:
- older products are often replaces by newer, but initially more expensive, products. New goods are periodically added to the market basket, and the older goods they replace are reduced in weight in the index.
2) Quality changes:
- if the price of a product increases because the product has improved, the price increase is not due to inflation but still increases the price index.
3) Substitution:
- when two goods are substituted for each other, consumers increase their purchases of the relatively cheaper good and buy less of the relatively more expensive good. Over time, this can make a Laspeyres index's fixed basket of goods a less accurate measure of typical household spending.
- older products are often replaces by newer, but initially more expensive, products. New goods are periodically added to the market basket, and the older goods they replace are reduced in weight in the index.
2) Quality changes:
- if the price of a product increases because the product has improved, the price increase is not due to inflation but still increases the price index.
3) Substitution:
- when two goods are substituted for each other, consumers increase their purchases of the relatively cheaper good and buy less of the relatively more expensive good. Over time, this can make a Laspeyres index's fixed basket of goods a less accurate measure of typical household spending.
question
Paasche Index
answer
Uses the current consumption weights, prices from the base period, and prices in the current period.
question
Cost-push inflation
answer
results from a decrease in aggregate supply
question
demand-pull inflation
answer
results from an increase in aggregate demand
question
What happens to prices if cost-push inflation brings about a policy response that stimulates aggregate demand to return to its long-run potential?
answer
The result would be a further increase in the price level.
question
When is upward pressure on wages likely to occur? (which kind of unemployment is low?)
answer
Cyclical
- can still occur otherwise
- can still occur otherwise
question
When are wage increases not inflationary?
answer
If they remain in line with gains in productivity.
question
What do economists often use to indicate the potential for demand-pull inflation?
answer
Capacity utilization rate
- high rate suggests economy is producing at or above potential GDP and may experience inflationary pressure.
- high rate suggests economy is producing at or above potential GDP and may experience inflationary pressure.
question
Coincident indicator
answer
change direction at roughly the same time as peaks or troughs.
question
Print figure 5, page 171
answer
...
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
