6 Business Cycles AD-AS

Question 1

Business cycles

Answer 1

Periods of expansion and slowdown of economic activity

Question 2

Recession

Answer 2

Negative growth for two consecutive quarters

Question 3

Contraction

Answer 3

When real output is lower than the previous time period

Question 4

Expansion

Answer 4

When real output is higher than the previous time period

Question 5

Time series data

Answer 5

Records observations of a variable over time

Question 6

Stationary data

Answer 6

Time series data that has a constant mean value over time

Question 7

Non stationary data

Answer 7

Time series data where the mean can either rise or fall over time

Question 8

Deterministic trends

Answer 8

Are constant independent of time

Question 9

Stochastic trends

Answer 9

Vary by some random amount each time period

Question 10

Pro cyclical variable

Answer 10

A variable that is above trend when GDP is above trend (real wages)

Question 11

Countercyclical variable

Answer 11

A variable that is below trend when GDP is above trend (unemployment)

Question 12

Leading indicator

Answer 12

Can be used to foretell future changes

Question 13

Lagging indicator

Answer 13

Used to show past changes

Question 14

Coincident indicator

Answer 14

Occurs at the same time as the changes

Question 15

Real business cycle model assumptions

Answer 15

No market imperfections
Optimal behaviour
Market clearing

Question 16

How does the real business cycle model predict a negative shock will impact the market?

Answer 16

A negative technology shock reduces labour productivity and therefore the demand for labour falls. Output falls because supply falls. Prices rise and there is a rise in interest rates which decreases investment.

Question 17

Who uses Dynamic stochastic general equilibrium models?

Answer 17

Often used by central banks

Question 18

What are disadvantages of models

Answer 18

They are approximations so are never perfectly accurate. Until recently they were under used or used poorly

Question 19

When does the classical dichotomy and money neutrality occur?

Answer 19

In the long run

Question 20

When are real variables affected by changes in the money supply?

Answer 20

In the short run

Question 21

What does the AS curve show?

Answer 21

The quantity of goods and services that households, firms, the government and customers abroad want to buy at each price

Question 22

What does the AS curve show?

Answer 22

The quantity of goods snd services that forms are willing to sell at each price level.

Question 23

What are the 3 effects which make the AD curve downward sloping?

Answer 23

Wealth effect (c)
Interest rate effect (I)
Exchange rate effect (NX)

Question 24

What is the wealth effect?

Answer 24

A decrease in price, increases the real value of money. Consumers feel wealthier and increase their spending

Question 25

What is the interest rate effect?

Answer 25

Decrease in price level, real money balances are in excess supply. Households buy illiquid assets which makes the interest rate drop. Stimulates spending on investment goods

Question 26

What is the exchange rate effect?

Answer 26

Decrease in UK price level, reduces interest rate. UK pound depreciated as Net Capital Outflows increase and supply of pounds on FX market increases. Stimulates UK exports and suppresses UK imports so NX increases

Question 27

What causes a shift in the AD curve?

Answer 27

Consumption Investment Government spending Net exports

Question 28

What is the LRAS curve determined and shifted by?

Answer 28

Capital Labour Natural resources Technology

Question 29

When is the LR output level achieved?

Answer 29

When all existing factors of production are fully utilised and unemployment is at its natural rate.

Question 30

What are the theories for why the SRAS curve is upward sloping

Answer 30

Sticky wage theory Sticky price theory Misperceptions theory

Question 31

What happens to output when the actual price rises above the expected price?

Answer 31

The output rises above its natural rate

Question 32

Sticky wage theory

Answer 32

Nominal wages are based on expected prices but are slow to adjust. If price is lower than expected, then real wages are higher and so workers are sacked and less is produced

Question 33

Sticky price theory

Answer 33

Prices are slow to adjust. Prices are the firms’ marginal revenue. If actual prices are lower than expected so is revenue so firms might be forced to cut production

Question 34

Misperceptions theory

Answer 34

Changed in overall price level can temporarily mislead suppliers. Suppliers see a drop in prices below the expected level, the firms see this a fall in their prices and so drop production when actually all prices have fallen

Question 35

In the long run what is true of prices?

Answer 35

Actual prices equals expected prices

Question 36

What shifts the SRAS curve?

Answer 36

``` Labour Capital Natural resources Technological change Changes in expectation ```