11 Understanding Business Cycles

Question 1

Business cycle

Answer 1

determined by GDP and rate of unemployment

Question 2

Business Cycle phases

Answer 2

1. Expansion (real gDP increasing). 2. Peak (real GDP stops increasing and starts decreasing). 3. Contraction/recession (real GDP is decreasing). 4. Trough (real GDP stops decreasing and begins increasing.

Question 3

Expansion

Answer 3

Growth in most sectors of economy, inflation accelerates at peak.

Question 4

Contraction/recession

Answer 4

declines in most sectors, inflation is decreasing

Question 5

Credit cycle

Answer 5

Cyclical fluctuations in interest rates and availability of loans. These can amplify business cycles if there’s loose credit.

Question 6

Inventory/sales ratio

Answer 6

Tend to normal level in economic growth. Expansion at peak - sales slow and ratio is bigger. They reduce production. contraction reaches trough and sales grwoth accelerates, ratio is below normal. Increase output.

Question 7

Durable goods.

Answer 7

Appliances, furniture, autos, etc, but more during expansion and less during contraction.

Question 8

Factors that determine level of a country’s imports/exports

Answer 8

GDP growth, GDP growth of trading partners, and currency exchange rates. GDP growth of country encourages foreign imports. Increase in currency decreases exports.

Question 9

Trough

Answer 9

GDP growth rate from - to +. High unemployment, use overtime. Spending on durable goods ^. Decreasing inflation rate.

Question 10

Expansion

Answer 10

GDP growth rate ^. Unemployment decreases as hiring ^. Investment in equipment and home construction ^. Inflation increases, imports increase.

Question 11

Peak

Answer 11

GDP growth rate decreases. Unemployment rate decreases but hiring slows. Consumer spending and investment grow more slowly. Inflation rate ^.

Question 12

Contraction/recession

Answer 12

GDP growth rate is negative, hours worked decrease and unemployment rate increases.consumer spending/investment decrease. Inflation rate decreasses with a lag. Imports decrease as domestic income growth slows.

Question 13

Neoclassical school

Answer 13

Shifts in agg demand and supply are driven by technology. Businesses cycles occur because of temporary deviations from long-run equilibrium.

Question 14

Keynesian

Answer 14

Wages are downward sticky.Shifts in agg demand are due to changes in expectations of business owners causing business cycles. Use monetary/fiscal policy to adjust aggregate demand.

Question 15

New Keynesian

Answer 15

Prices of productive inputs other than labor are also sticky

Question 16

Austrian school

Answer 16

business cycles are caused by gov intervention

Question 17

New Classical School/RBC

Answer 17

Business cycles are caused by changes in tech, external schocks

Question 18

Leading indicators

Answer 18

Change directions before a peak/trough in a business cycle. Weekly hrs in manufacturing, unemployment claims, manufaturers’ orders for consumer gods, S&P 500 price index, credit index, 10-year treasury/fed funds rate spread.

Question 19

Coincident indicators

Answer 19

change direction at the same time as peaks/troughs. Employees on nonfarm payrolls, real personal income, index of industrial production, manufacturing sales.

Question 20

Lagging indicators

Answer 20

Don’t change direction until after expansions/contractions. Avg duration of unemployment, inventory/sales ratio, change in unit labor costs, average prime lending rate, loans,change in CPI.

Question 21

Frictional, structural, cyclical unemployment

Answer 21

Time lag necessary to match employees who seek and employers who need skills. 2. Cause some jobs to be eliminated but new jobs created, so eliminated people don’t have skills for new job. 3. Caused by changes in general level of economy activity.

Question 22

Hyperinflation

Answer 22

Inflation accelerating out of control. Can destroy a country’s monetary system.

Question 23

Disinflation

Answer 23

inflation rate decreasing over time but greater than zero

Question 24

Deflation

Answer 24

Deep recessions. Persistently decreasing price level. People put off buying because they think prices will get lower.

Question 25

CPI

Answer 25

(cost of basket at current prices/cost of basket at base period prices) * 200

Question 26

Headline vs Core inflation

Answer 26

headline price index for all goods, core excludes food and energy