BU - Business Cycle Flashcards
Business Cycle Phases
General phases: Expansion & Contraction
Peak
Trough
Expansion
increasing gross domestic product (GDP) and decreasing unemployment rate
Contraction
decreasing GDP and increasing unemployment
Peak
very high GDP and peak employment (very low unemployment)
Trough
very low GDP (very typically negative GDP) and by high and widespread unemployment
Gross domestic product (GDP)
the market value of the goods and services produced by labor and property in the United States
Recession
two consecutive quarters of negative GDP growth.
Expansion Activities: Early
Activity rebounds
Credit begins to grow
Profits grow rapidly
Policy still simulative
Inventors low, sales improve
Expansion Activity: Mid
Growth peaking
Credit growth strong
Profits growth peak
Policy neutral
Inventories, sales grow; equilibrium reached
Expansion Activity: Late
Growth moderating
Credit tightens
Earnings under pressure
Policy contractionary
Inventories grow, sales growth falls
- Inflation high
Contraction Activities
Falling activity
Credit dries up
Profits decline
Policy eases
Inventories, sales fall
GDP is important because it
Indicates the pace of growth or decline of the economy relative to history
Determines which sectors are over or under-performing
Can compare the size and growth rate of economies throughout the world
Real GDP Includes and Excludes:
includes:
-Market value of all final goods and services produced within an economy
-Income of foreigners working in the U.S.
-Profits that foreign companies earn in the U.S.
excludes:
-Imports
-Inflation
-Transactions were money changes hands but no new goods or services are produced
-Income of U.S. citizens working abroad
-Profits earned by U.S. companies in foreign countries
GDP Formula
Y = C + I + G + (X – M) or C + I + G + NE
C is consumer spending
I is investment made by industry (fixed investment ad change in private inventory)
G is government spending
X-M is excess of exports over imports
you may see this listed as ‘NE’ for Net Exports
The GDP formula would be listed as C + I + G + NE
- Price elasticity
- Elastic
- Inelastic
- measures the quantity demanded of a good in response to changes in that good’s price.
- A good is elastic when its quantity demanded responds greatly to price changes.
Price goes up, demand downs down
- A good is inelastic when its quantity demanded responds little to price changes (gasoline, consumer staples)
Price goes up, the demand doesn’t change
Marginal utility
is the additional benefit (utility) received from the consumption of an additional unit of a good.
Ex: all you can eat buffet, at some point the more units is no longer beneficial
Which law indicated that demand for an economic product will vary inversely with its price?
Law of demand
Fiscal policy refers to…
the taxation, expenditures, and debt management by the federal government and how these interventions influence the economy.
Fiscal Policy: Who controls the taxation and spending of the government in the United States?
Congress
-
Taxation is the only means of revenue generation for the government.
- Congress uses these revenues to finance the operations of the federal government.
Fiscal Policy: How does changes in taxation affect corporations and individuals?
- Increases in tax rates reduce disposable income.
- Decreases in tax rates increase disposable income.
Fiscal policy: How does changes in the government spending impact the economic growth?
- Increases in government spending are used to promote economic growth and/or recovery.
- Once the economy is functioning, the government will eliminate the support.
Fiscal Policy: What is deficient spending & what activities occur?
It is when Government expenditures exceed the revenues generated .
- The government will sell Treasury Securities.
- These Treasury Securities compete with other issuers of debt securities driving values lower.
Monetary Policy controls…and is controlled by…
the money supply, influences lending rates, may slow down or stimulate the economy.
- Controlled by the Federal Reserve Bank (the Fed)
Monetary policy: Fed mandates:
- Maintain sustainable long-term growth as measured by gross domestic product (GDP)
- Maintain price levels that are supported by that economic growth as measured by inflation (CPI)
- Maintain full employment as measured by the long-term unemployment rate
Monetary Policy: Fed tools (3)
- Discount rate: The rate at which member banks borrow from the government.
- Reserve requirement: Percentage of deposits that must be held on reserve.
- Open market activities: Fed buys and sells securities in the open market.
Monetary Policy Action: Contraction “tight”
What happens to:
Discount Rate?
Reserve Requirements?
Open market activities?
- discount rate increases, which increases the cost of borrowing
- Reserve requirements increases
- Fed Sells securities to the market
Slows pace of growth
Monetary Policy Action: Expansionary “easy”
What happens to:
Discount Rate?
Reserve Requirements?
Open market activities?
- discount rate decreases, which lowers the cost of borrowing
- reserve requirements decreases, increasing the amount available to be lent out
- Fed buys securities from the market which puts money back into circulation
increases pace of growth
Supply & Demand: Substitutes
an increase in the price of one will cause an increase in the demand for the other (example would be price hikes in oil, gas or propane may lead to more firewood demand)
Supply & Demand: Complements
products that are usually consumed jointly, when the price of one decreases, other other may increase (example would be PB on sale, and Jelly increase)
Law of Demand
As prices increase, demand will decrease
inverse reactions
Law of Supply
As demand increases, so will supplies
Supply-side inflation (cost-push)
Demand-pull inflation
Supply-side: decrease in the aggregate supply of goods and services stemming from an increase in the cost of production
Demand-pull: the increase in aggregate demand, categorized by households, business, government and foreign buyers. Can be caused by an expanding economy, increased gov’t spending or overseas growth.
Lagging indicators
Lagging indicators tend to follow or lag economic performance
- Average duration of unemployment
- Ratio of trade inventories to sales
- Change in index of labor cost per unit of output
- Average prime rate
- Commercial and industrial loans outstanding
- Ratio of consumer installment credit outstanding to personal income
- Change in Consumer Price Index (CPI)
Coincident indicator
Coincident indicators tend to change at the same time as the economy:
- Employees on non-agricultural payrolls
- Personal income less transfer payments
- Industrial production
- Manufacturing and trade sales
Leading indicators
These tend to rise and fall in advance of the economy
- Average weekly hours of production workers (manufacturing)
- Initial claims for unemployment insurance
- Manufacturers’ new orders
- Percentage of companies reporting slower deliveries
- New orders of non-defense capital goods
- New private housing starts
- Yield curve
- S&P 500
- Money supply (M2) growth rate
- Index of consumer expectation
