11 Understanding Business Cycles Flashcards
Business cycle
determined by GDP and rate of unemployment
Business Cycle phases
- 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.
Expansion
Growth in most sectors of economy, inflation accelerates at peak.
Contraction/recession
declines in most sectors, inflation is decreasing
Credit cycle
Cyclical fluctuations in interest rates and availability of loans. These can amplify business cycles if there’s loose credit.
Inventory/sales ratio
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.
Durable goods.
Appliances, furniture, autos, etc, but more during expansion and less during contraction.
Factors that determine level of a country’s imports/exports
GDP growth, GDP growth of trading partners, and currency exchange rates. GDP growth of country encourages foreign imports. Increase in currency decreases exports.
Trough
GDP growth rate from - to +. High unemployment, use overtime. Spending on durable goods ^. Decreasing inflation rate.
Expansion
GDP growth rate ^. Unemployment decreases as hiring ^. Investment in equipment and home construction ^. Inflation increases, imports increase.
Peak
GDP growth rate decreases. Unemployment rate decreases but hiring slows. Consumer spending and investment grow more slowly. Inflation rate ^.
Contraction/recession
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.
Neoclassical school
Shifts in agg demand and supply are driven by technology. Businesses cycles occur because of temporary deviations from long-run equilibrium.
Keynesian
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.
New Keynesian
Prices of productive inputs other than labor are also sticky
Austrian school
business cycles are caused by gov intervention
New Classical School/RBC
Business cycles are caused by changes in tech, external schocks
Leading indicators
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.
Coincident indicators
change direction at the same time as peaks/troughs. Employees on nonfarm payrolls, real personal income, index of industrial production, manufacturing sales.
Lagging indicators
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.
Frictional, structural, cyclical unemployment
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.
Hyperinflation
Inflation accelerating out of control. Can destroy a country’s monetary system.
Disinflation
inflation rate decreasing over time but greater than zero
Deflation
Deep recessions. Persistently decreasing price level. People put off buying because they think prices will get lower.
CPI
(cost of basket at current prices/cost of basket at base period prices) * 200
Headline vs Core inflation
headline price index for all goods, core excludes food and energy
