Book 1_Econ_Understand business cycles

Question 1

• Expansion

Answer 1

Real GDP is increasing (or GDP growth relative to trend is increasing).

Question 2

• Peak

Answer 2

Real GDP stops increasing/begins decreasing (GDP growth relative to trend peaks)

Question 3

• Contraction

Answer 3

Real GDP is decreasing (or GDP growth relative to trend is decreasing).

Question 4

• Trough

Answer 4

Real GDP stops decreasing/begins increasing (GDP growth relative to trend reaches a low).

Question 5

• Expansions feature

Answer 5

increasing output, employment, consumption, investment, and inflation.

Question 6

• Contractions features

Answer 6

Decreasing output, employment, consumption, investment, and inflation.

Question 7

• Business cycles features

Answer 7

• Business cycles are recurring, but they do not occur at regular intervals, can differ in strength or severity, and do not persist for specific lengths of time.

Question 8

• Credit cycles definition

Answer 8

• are cyclical fluctuations in interest rates and credit availability.
• Credit cycles may amplify business cycles and cause bubbles in the markets for some assets.

Question 9

• Inventory to sales ratios

Answer 9

o increase late in expansions when sales slow, and decrease near the end of contractions when sales begin to accelerate

Question 10

• Staff:

Answer 10

o Because hiring and laying off employees have high costs, firms prefer to adjust their use of current employees. As a result, firms are slow to lay off employees early in contractions and slow to add employees early in expansions.

Question 11

• physical capital

Answer 11

o more intensively during expansions, investing in new capacity only if they believe the expansion is likely to continue.
o less intensively during contractions, but they are more likely to reduce capacity by deferring maintenance and not replacing equipment than by selling their physical capital.

Question 12

• Consumer spending

Answer 12

o Durable goods spending is highly sensitive to business cycles,
o spending on services is somewhat sensitive
o spending on nondurable goods is relatively less sensitive to business cycles.

Question 13

• The level of activity in the housing sector

Answer 13

o affected by mortgage rates, demographic changes, the ratio of income to housing prices, and investment or speculative demand for homes resulting from recent price trends.

Question 14

• Domestic imports

Answer 14

o tend to rise with increases in GDP growth and domestic currency appreciation

Question 15

• domestic export volumes.

Answer 15

o increases in foreign incomes and domestic currency depreciation tend to increase

Question 16

Economic Indicators

Answer 16

• Leading indicators
• Coincident indicators
• Lagging indicators

Question 17

Leading indicators

Answer 17

have turning points that tend to precede those of the business cycle.

Question 18

Coincident indicators

Answer 18

have turning points that tend to coincide with those of the business cycle.

Question 19

Lagging indicators

Answer 19

have turning points that tend to occur after those of the business cycle.