Business 5: Changes in Economic and Business Cycles Flashcards
What do business cycles refer to?
Rise and fall of economic activity relative to its LT growth trend
What do business cycles refer to?
Rise and fall of economic activity relative to its LT growth trend
Define GDP
total market value of all final g&s produced w/i the borders of a nation in a particular period
Define GDP
total market value of all final g&s produced w/i the borders of a nation in a particular period
Does GDP include the output of foreign-owned factories in the US?
Yes
Does GDP include the output of US owned factories operating abroad?
No (included in GNP)
Is nominal GDP adjusted for inflation?
NO (reflects current prices)
Is real GDP adjusted for inflation?
YES (reflects constant prices)
How would you calculate real GDP?
= (nominal GDP / GDP deflator) * 100
How would you calculate real GDP?
= (nominal GDP / GDP deflator) * 100
How would you calculate the change in real GDP?
= (CY real GDP / PY real GDP) - 1
How would you calculate the change in real GDP?
= (CY real GDP / PY real GDP) - 1
What is real GDP per capita?
real GDP divided by population
How is economic growth generally measured?
= increase in real GDP per capita over time
How is economic growth generally measured?
= increase in real GDP per capita over time
What is an expansionary phase characterized by?
- Rising GDP, profits, prices
- Falling unemployment
A peak is a _____ ____ of economic activity.
High point
A peak is a _____ ____ of economic activity.
High point
What is a contractionary phase characterized by?
- Falling GDP, profits
- Rising unemployment
An economy contracts until it reaches its what?
Trough
An economy contracts until it reaches its what?
Trough
What phase follows a trough in the business cycle?
Recovery phase
What phase follows a trough in the business cycle?
Recovery phase
How do economists define a recession?
2 consecutive quarters of falling national output
What do you call a very severe recession?
Depression
What do you call a very severe recession?
Depression
What type of indicators tend to predict economic activity?
Leading indicators
What type of indicators tend to follow economic activity?
Lagging indicators
What type of indicators tend to follow economic activity?
Lagging indicators
What type of indicators provide info about the current state of the economy?
Coincident indicators
What type of indicators provide info about the current state of the economy?
Coincident indicators
Economists generally agree that business cycles result from shifts in what?
Aggregate demand and/or aggregate supply
What does the AD curve illustrate?
- Max quantity of all g&s producers are willing and able to produce @ any given price level
What does the AS curve illustrate?
- Max quantity of all g&s producers are willing and able to produce at any given price level
What does the AS curve illustrate?
- Max quantity of all g&s producers are willing and able to produce at any given price level
Why is the SRAS curve upward sloping?
- illustrates that as prices increase, firms willing to produce more g&s
Why is the LRAS curve vertical?
- illustrates that in LR, if all resources are fully utilized, output is determined solely by the factors of production (availability of resources, not by price)
- corresponds to potential level of output in the economy
Why is the LRAS curve vertical?
- illustrates that in LR, if all resources are fully utilized, output is determined solely by the factors of production (availability of resources, not by price)
- corresponds to potential level of output in the economy
What does potential GDP refer to?
Level of real GDP (national output) the economy would produce if its resources (capital and labor) were fully employed
When real GDP is below potential GDP, what business cycle will the economy typically be in?
Recession
When real GDP is above potential GDP, what business cycle will the economy typically be in?
Expansion
What happens when there is an overall reduction of demand in the economy?
- Falling GDP, profits, prices
- Rising unemployment
What happens when there is an overall reduction of demand in the economy?
- Falling GDP, profits, prices
- Rising unemployment
What happens when there is an overall increase in the demand for goods and services by individuals, businesses, and governments within an economy?
- Rising GDP, profits, prices
- Falling unempoyment
What happens when there is an overall increase in the demand for goods and services by individuals, businesses, and governments within an economy?
- Rising GDP, profits, prices
- Falling unempoyment
What happens if there is a reduction in supply?
- Falling GDP, profits
- Rising unemployment, prices
What happens if there is an increase in supply?
- Higher GDP, profits
- Lower unemployment, prices
If wealth increases in an economy, what will happen to overall demand?
Overall demand is going to go up
If wealth increases in an economy, what will happen to overall demand?
Overall demand is going to go up
A decrease in wealth would cause the AD curve to shift in what direction?
left
A decrease in wealth would cause the AD curve to shift in what direction?
left
What two things result from an increase in real interest rates?
individuals and businesses
1) save more
2) borrow less
What two things result from an increase in real interest rates?
individuals and businesses
1) save more
2) borrow less
What two things result from an increase in real interest rates?
individuals and businesses
1) save more
2) borrow less
An increase in real interest rates would cause what shift in the AD curve?
- Shift AD curve left, causing GDP to fall
- Unemployment rises, prices fall
An increase in real interest rates would cause what shift in the AD curve?
- Shift AD curve left, causing GDP to fall
- Unemployment rises, prices fall
When there is a decrease in real interest rates, what two things tend to happen?
People tend to
1) save less
2) borrow more
When there is a decrease in real interest rates, what two things tend to happen?
People tend to
1) save less
2) borrow more
A decrease in real interest rates would case what shift in the AD curve?
- Shift AD right, causing GDP to rise
- Unemployment falls, prices rise
What is another term for appreciated currencies?
Strong currencies
What is another term for depreciated currencies?
Weak currencies
What is another term for depreciated currencies?
Weak currencies
If $ is strong, $ more expensive relative to foreign currencies. What does this mean in terms of net exports?
- Less exports (goods become relatively more expensive for foreigners)
- More imports (goods become relatively less expensive for residents)
- NET EXPORTS FALL
How does a strong currency impact the AD curve?
SHIFT AD CURVE LEFT (GDP falls, unemployment rises, prices fall)
If $ is strong, $ more expensive relative to foreign currencies. What does this mean in terms of net exports?
- Less exports (goods become relatively more expensive for foreigners)
- More imports (goods become relatively less expensive for residents)
- NET EXPORTS FALL
How does a strong currency impact the AD curve?
SHIFT AD CURVE LEFT (GDP falls, unemployment rises, prices fall)
If $ is weak $ less expensive relative to foreign currencies. What does this mean in terms of net exports?
- More exports (goods become relatively less expensive for foreigners)
- Less imports (goods become relatively more expensive for residents)
- NET EXPORTS RISE
How does a weak currency impact the AD curve?
SHIFT RIGHT
How does a weak currency impact the AD curve?
SHIFT RIGHT (GDP rises, unemployment falls, prices rise)
How does a weak currency impact the AD curve?
SHIFT RIGHT (GDP rises, unemployment falls, prices rise)
Can changes in government spending and consumer tastes impact AD?
YES
Can changes in government spending and consumer taxes impact AD? [fiscal policy]
YES
Can changes in government spending and consumer taxes impact AD? [fiscal policy]
YES
How does an increase in government spending impact AD?
- AD increases, GDP increases
- Unemployment falls, prices increase
How does a decrease in government spending impact AD?
- AD decreases, GDP decreases
- Unemployment rises, prices fall
If the gov’t increased consumer taxes, how would that impact AD?
- AD falls, GDP falls
- Unemployment rises, prices fall
If the gov’t increased consumer taxes, how would that impact AD?
- AD falls, GDP falls
- Unemployment rises, prices fall
What is the government doing when implementing expansionary fiscal policy?
- Increase gov’t spending
- Decrease consumer taxes
SHIFT AD RIGHT
What is the government doing when implementing contractionary fiscal policy?
- Decrease gov’t spending
- Increase consumer taxes
SHIFT AD LEFT
What is the government doing when implementing contractionary fiscal policy?
- Decrease gov’t spending
- Increase consumer taxes
SHIFT AD LEFT
What is the goal of expansionary fiscal policy?
GOAL: push economy back to LR potential output
What is the goal of expansionary fiscal policy?
GOAL: push economy back to LR potential output
What factors shift AD?
TWICE Government:
Taxes Wealth Interest rates Consumer confidence Exchange rates Government spending
What factors shift AD?
TWICE Government:
Taxes Wealth Interest rates Consumer confidence Exchange rates Government spending
What does the multiplier effect refer to?
Fact that an increase in consumer, firm, or gov’t spending produces a multiplied increase in the level of economic activity
What does the multiplier effect result from?
From the MPC (marginal propensity to consumer)
What is the MPC?
Change in consumption due to $1 increase in income
B/c people tend to save part of their income, the MPC is typically less than what?
ONE
Using the MPC, how do you calculate the size of the multiplier effect?
= 1 / (1-MPC)
= 1 / MPS
How do you calculate change in real GDP?
= multiplier
= change in spending
How do you calculate change in real GDP?
= multiplier * change in spending
How do you calculate change in real GDP?
= multiplier * change in spending
Factors that shift SRAS are factors related to what?
Resources
Factors that shift SRAS are factors related to what?
Resources
What two factors would cause a change in SRAS?
1) Input or resource prices
2) Supply shocks (changes in resource availability)
What two factors would cause a shift in SRAS?
1) Input or resource prices
2) Supply shocks (changes in resource availability)
