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BEC > BEC 5 Changes in economic and business cycles > Flashcards

BEC 5 Changes in economic and business cycles Flashcards

1
Q

Gross Domestic Product (GPD)

A

total market value of all final goods and serves produced within the borders of a nation in a period of time

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2
Q

Nominal GDP

A
  • measured in “today’s” prices

- measures the value of all final goods and services in prices prevailing at the time of production (current prices)

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3
Q

Real GDP

A
  • measured in “base year” prices
  • measures the value of all final goods and services in constant prices.
  • It is adjusted to account for changes in the price level.
  • Real GDP is the most commonly used measure of economic activity and national output,
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4
Q

Price Index

A

GDP Deflator - calculates real GDP
It is a price index for all goods and services included in GDP.

Real GDP = (Nominal GDP / GDL deflator ) x 100

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5
Q

Real GDP per Capita and Economic Growth

A

Real per capital GDP = real GDP / population

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6
Q

Economic growth

A

the increase in real GDP per capita over time

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7
Q

Business Cycles

A
  1. Expansionary phase - rising economic activity and growth
  2. Peak - high point of economic activity
  3. Contractionary phase - falling economic activity and growth
  4. Trough - low point, the lowest level
  5. Recovery phase - increase
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8
Q

Recession

A
  • below long term average growth
  • two consecutive quarters of falling national output
  • negative real economic growth
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9
Q

Depression

A
  • a very severe recession

- a relatively long period of stagnation

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10
Q

Economic indicators

A
  1. Leading indicators
  2. Lagging indicators
  3. Coincident indicators
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11
Q

Leading indicators

A

Predicting before the fact actually happens

  • average new unemployment claims
  • building permits for residences
  • average length of the workweek
  • money supply
  • prices of selected stocks
  • orders for goods
  • prices changes of materials
  • index of customer expectations
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12
Q

Lagging indicators

A

Predicting after the fact happened

  • prime rate charged by banks
  • average duration of unemployment
  • bank loans outstanding
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13
Q

Coincident indicators

A

Occur at the same time as the economic activity

  • industrial production
  • manufacturing and trade sales
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14
Q

Reasons for fluctuations

A

business cycles result from shifts in aggregate demand and/or aggregate supply

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15
Q

Aggregate Demand (AD) Curve

A

the maximum quantity of all goods and services that households, firms and the government are willing and able to purchase at any given price level

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16
Q

Aggregate Supply (AS) Curve

A

the maximum quantity of all goods and services producers are willing and able to produce at any given price level
1. Short run aggregate supply curve - upward sloping, Price UP/ Production UP
2. Long run aggregate supply curve - vertical line, potential level of output in the economy, independent of price level, resources available to produce
3. Potential level of output - the level of real GDP that the economy would produce if its resources were fully employed
Real GDP below the potential level of output - recession
Above - expansion

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17
Q

Aggregate demand, aggregate supply and economic fluctuations

A

business cycles are results of shifts in aggregate demand and short run aggregate supply

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18
Q

Reduction in demand

A

IF reduced demand, real GDP will decline, leading to a contraction in economic activity and possibly a recession.

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19
Q

Increase in demand

A

if increased demand, GDP will rise, employment, reduction in excess capacity leading them to increase the size of their workforce

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20
Q

Factors that shift aggregate demand

A
  1. Changes in wealth
    a. Increase - aggregate demand shifts to the right
    b. Decrease - ag. demand left
  2. Changes in Real Interest Rates
    a. Increase - reduction in demand
    b. Decrease - increase
  3. Changes in expectations about the future economic outlook
    a. Confident - demand up
    b. Uncertain - demand down
  4. Changes in Exchange rates
    a. Appreciated - expensive foreign demand, aggregate demand down
    b. Depreciated - cheap for foreigners, demand up
  5. Changes in Government spending
    a. Increase - demand up
    b. Decrease - down
  6. Changes in Consumer Taxes
    a. Increase - demand down (shifts to left)
    b. Decrease - up
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21
Q

Multiplier effect

A

an increase in consumer, firm or government speeding produces a multiplied increase int he level of economic activity.
The multiplier effect results from the marginal propensity to consume (MPC)
Multiplier = 1 / (1-MPC)
Change in real GDP = Multiplier = Change in spending

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22
Q

Factors that Shift short run aggregate supply

A
  1. Changes in input prices
    a. increase in input prices - shift left
    b. decrease in input prices - shift to right
  2. Supply shocks
    a. plentiful - right
    b. curtailed - left
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23
Q

Economic measures

A
  1. Real gross domestic product
  2. Unemployment rate
  3. Inflation rate
  4. Interest rate
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24
Q

The National Income and Product Accounting (NIPA

A

developed by the US Department of Commerce in order to monitor the health and performance of the US economy.

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25
Q

Expenditure Approach

A
  1. Government purchases of goods and services
  2. Gross private domestic investment
  3. Personal consumption expenditures
  4. Net Exports (exports - imports)
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26
Q

Income Approach

A
  1. Income of proprietors
  2. Profits of corporations
  3. Interest
  4. Rental income
  5. Adjustments for net foreign income and misc items
  6. Taxes (indirect business taxes)
  7. Employee compensation (wages)
  8. Depreciation (capital consumption allowance)
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27
Q

Comparison of approaches

A

Expenditures approach (flow of product) = Income Approach (earnings and costs)

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28
Q

Net Domestic Product

A

GDP less depreciation (capital consumption allowance)

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29
Q

Gross National Product (GNP)

A

market value of final goods and services produced by residents of a country in a given time period

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30
Q

Net National Product (NNP)

A

Gross National Product less economic depreciation

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31
Q

National Income

A

Net National Product less indirect business taxes

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32
Q

Personal Income

A

income received by households and non corporate businesses

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33
Q

Disposal Income

A

personal income less personal taxes

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34
Q

Unemployment rate

A

measures the ratio of the number of people classified as unemployed to the total labor force.

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35
Q

Labor force

A
  • noninstitutionalized individuals 16 years of age or older who are working or looking for work
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36
Q

Unemployment rate formula

A

(Number of unemployed / Total labor force) x 100

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37
Q

Types of unemployment

A
  1. Frictional unemployment
  2. Structural unemployment
  3. Seasonal unemployment
  4. Cyclical unemployment
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38
Q

Frictional unemployment

A

normal unemployment resulting from workers routinely changing jobs or from workers being temporarily laid off.

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39
Q

Structural unemployment

A
  • jobs available in the market do not correspond to the skills of the workforce
  • unemployed workers do not live where the jobs are located
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40
Q

Seasonal unemployment

A

seasonal changes in the demand and supply of labor

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41
Q

Cyclical unemployment

A

amount of unemployment resulting from declines in real GDP during periods of contraction or recession or in any period when the economy fails to operate at its potential

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42
Q

Natural rate of unemployment

A

normal rate of unemployment around which the unemployment rate fluctuates due to cyclical unemployment.

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43
Q

Full employment

A

level of unemployment when there is no cyclical unemployment (there is still some unemployment)

natural rate = full employment

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44
Q

Inflation

A

sustained increase in the general prices go goods and services

45
Q

Deflation

A

sustained decrease in the general prices of goods and services

46
Q

Inflation/Deflation rate

A

% change in the customer price index (CPI) from one period to the next

47
Q

Consumer Price Index (CPI)

A

measure of the overall cost of a fixed basket of goods and services purchased by an average household

48
Q

Consumer Price Index Formula

A

Inflation rate = ((CPI this period - CPI last period)/CPI last period) x 100

49
Q

Causes of inflation and deflation

A
  • caused by shifts in the aggregate demand and short run aggregate supply curves
  • shift right aggregate demand - price level rises - inflation
  • shift left short run aggregate supply - price level rises - inflation
50
Q

Demand pull inflation

A

Caused by increases in aggregate demand

  • increases in government spending
  • decreases in taxes
  • increases in wealth
  • increases in the money supply
51
Q

Cost push inflation

A

Caused by reduction in short run aggregate supply

  • increase in oil price
  • increase in nominal wages
52
Q

Deflation

A

caused by shifts in aggregate demand or short run aggregate supply

  • shift left in aggregate demand - prices fall
  • shift right in short run aggregate supply - prices fall
53
Q

Inflation and the Value of Money

A

Inflation has an inverse relationship with “purchasing power” As price level rises, the value of money decline.

54
Q

Monetary assets and liabilities

A

fixed in dollar amounts regardless of changes in specific prices or the general price level

55
Q

Nonmonetary assets and liabilities

A

value of non monetary assets and non monetary liabilities will fluctuate with inflation and deflation

56
Q

Holding monetary assets

A

Inflation - money lose value

57
Q

Holding monetary liabilities

A

Inflation - fixed amount of debt good for creditors not good for companies that lend money

58
Q

The Philips Curve

A

inverse relationship between the rate of inflation and the unemployment rate

59
Q

Budget deficits

A

occurs when a country spends more than it takes in taxes

60
Q

Financial budget deficits

A

financed by government borrowing, which affects interest rates. The government could also finance budget deficits by printing new money.

61
Q

Cyclical budget deficit

A

caused by temporarily low economic activity.

62
Q

Structural budget deficit

A

caused by a structural imbalance between government spending and revenue

63
Q

Budget Surpluses

A

occurs when government revenues exceed government spending during the year

64
Q

Nominal Interest Rate

A

amount of interest paid measured in current dollars. When the economy experiences inflation, nominal interest rates are not a good measure of how much borrowers really pay or lenders really receive when they take out or make a loan.

65
Q

Real Interest Rate

A

the nominal interest rate less the inflation rate

Real interest rate = Nominal interest rate - Inflation rate

66
Q

Relationship between nominal interest rates and inflation

A

Nominal interest rates and inflation tend to move together.
When the inflation rate increases, so does the nominal interest rate.

Nominal interest rate = Real interest rate + Inflation

67
Q

Money

A

set of liquid assets that are generally accepted in exchange for hoods and services.

68
Q

Money supply

A

stock of all liquid assets available for transactions in the economy at any given point in time

69
Q

M1

A

money that is used for purchases of goods and services (coins, currency, checkable deposits)

70
Q

M2

A

M1 plus liquide assets that can’t be used as a medium of exchange but that ban be converted easily into checkable deposits or other components of M1 (savings accounts, mutual fund accounts etc)

71
Q

M3

A

M2 plus time certificates of deposits in excess of $100000

72
Q

Monetary policy and the money supply

A

use of the money supply to stabilize the economy

73
Q

The Federal Reserve controls the money supply by

A
  1. Open market operations
    a. Increase in the Money supply
    b. decrease in the money supply
  2. Changes in the discounts rates
  3. Changes in the required Reserve Ratio
74
Q

Demand for money is inversely related to interest rates

A

interest rates are determined by the supply of and demand for money

75
Q

Supply of money is fixed at a given point in time

A

the supply of money is determined by the Federal Reserve and is fixed at any given point in time at the level set by the Federal Reserve

76
Q

Expansionary monetary policy

A
  • increase in the monetary supply
  • interest rates fall
  • reduce the cost of capital
  • increase in aggregate demand shift to the right
  • real GDP rise, unemployment falls, price level rise
77
Q

Contractionary monetary policy

A
  • decrease in the money supply
  • interest rates increase
  • reduced investments and spending
  • decrease in aggregate demand shift to the left
  • unemployment rate rises, prices fall
78
Q

Will cause inflation

A

Aggregate demand increase

Aggregate supply decrease

79
Q

Full employment

A

no cyclical unemployment only natural unemployment

80
Q

Cyclical unemployment results from

A

recession

81
Q

Cost push inflation

A
  • inflation caused by a shift left in aggregate supply

- increase in input costs will cause the aggregate supply curve to shift left

82
Q

The discount rate set by the Federal Reserve

A

the rate established by the feds for short term loans the fed makes to member banks

83
Q

The Fed increases the money supply

A
  1. Federal open market committee purchasing or selling government securities
  2. Raising or lowering the discount rate
  3. Changing the reserve ratio
84
Q

The Fed implements an expansionary monetary policy

A
  • purchase additional US Government securities

- lower the discount rate

85
Q

To decrease the money supply, the Fed

A
  • sells government securities on the open market
  • increase the discount rate
  • increase the required reserve ratio
86
Q

To increase the money supply, the Fed

A
  • buy government securities in the open market
  • lower the discount rate
  • lower the required reserve ratio
87
Q

Increase in the money supply leads to

A
  • decline in interest rates
  • increase in investment
  • increase in aggregate demand
  • aggregate demand shifts to the right
88
Q

An increase in the discount rate would cause

A
  • the money supply to decrease

- interest rates to rise

89
Q

Reduction in inflation

A
  • decrease in aggregate demand

- increase in aggregate supply

90
Q

nominal interest rate is 8%
inflation rate is 6%
Real rate of interest?

A

8-6=2

91
Q

The inflation rate measures

A

the rate of increase in the overall price level in the economy

92
Q

Stagflation

A

a combination of rising unemployment and a rising price level

93
Q

The relationship between nominal interest rates and inflation

A

Nominal Interest rate = Real Interest Rate + Inflation

The overall price level is rising, nominal interest rates are rising too

94
Q

CPI - Customer Price Index

A
  • measures the costs of a market basket of specific goods commonly purchased by customers.
  • it measures consumer buying power and is not distorted by items generally bought by industry
95
Q

GDP calculation under expenditure approach

A

Total expenditures in the domestic economy are added up
+ government purchases of goods and services
+ gross private domestic investment
+ personal consumption expenditures
+ net exports - imports

96
Q

GDP calculation under income approach

A

Total value of resources costs and incomes generated during the measurement period

\+ income of proprietors
\+ profits of corporations
\+ interest 
\+ rental income
\+ adjustments for net foreign income
\+ taxes 
\+ employee compensation 
\+ depreciation
97
Q

Causes of demand pull inflation

A 
- increases in aggregate demand
so:
- increases government spending 
- decreases in taxes
- increases in wealth
- increases in consumer confidence 
- increases in the money supply
98
Q

Causes of cost push inflation

A
  • reductions in short run aggregate supply
    so:
  • increase in oil prices
  • increase in nominal wages
99
Q

Nominal GDP

A

measures the value of all final goods and services produced within the borders of a nation in terms of current dollars

100
Q

Real GDP

A

measures the value of all final goods and services produced within the borders of a nation in terms of constant prices

101
Q

Gross Domestic Product GDP

A

total market value of all final goods and services produced within the borders of a nation in a particular period.

102
Q

Federal Reserve can increase money supply

A
  1. Open market operations: purchase government securities on the open market
  2. Changes in the discount rate: lower the discount rate
  3. Changes in the required reserve ratio: lower the required reserve ratio
103
Q

Business cycle

A
  1. Expansionary phase: rising growth in economic activity
  2. Peak: high point
  3. Contractionary phase: declining growth in economic activity
  4. Trough: low point of economic activity
104
Q

Recession

A

a period during which real GDP is falling for at least two consecutive quarters.
Falling real output and rising unemployment

105
Q

Business cycle

A
  • the rise and fall of economic activity relative to its long term growth trend.
  • Business cycles vary in duration and severity
106
Q

Depression

A
  • severe recession

- long period of falling real GDP and high rates unemployment

107
Q

Business cycles result from

A

shifts in aggregate demand and aggregate supply

108
Q

Factors that shift aggregate demand

A
  • wealth
  • real interest rates
  • expectations about the future economic outlook
  • exchange rates
  • government spending
  • costumer taxes
109
Q

Factors that shirt short run aggregate supply

A

changes in input resource prices supply stock

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