Business cycle Flashcards
1
Q
2 phases and 2 turning points in BC
A
Recession/expnasion
Peak/trough
2
Q
Potential GDP-Actual GDP=
A
recessionary gap
3
Q
Keynesians say BC caused by…
A
fluctuations in AD with sticky wages
4
Q
Monetarists say BC caused by…
A
changes in money supply change AD and output
5
Q
Repalcement vs. new investment
A
Replacement of aging capital
Expansion of new capital
6
Q
4 stage Accelarator and Multiplier mechanism (Expansion)
A
- Positive AE shock raises AD and GDP via multiplier
- Rising GDP stimulates investment
- Higher investment raises GDP via accelerator
- Higher GDP raises profit expectations increasing accelerator and multiplier
7
Q
Reverse 4 stage Accelerator and Multiplier mechanism (recession)
A
- High IR cause investment to slow
- Reduced accelerator causes GDP to fall
- Lower growth reduces expectations
- Investment decreases further
8
Q
3 stage Technology mechanism
A
- Technology shocks change productivity of labour
- This affects demand for labour and therefore AS
- Changes in AS affect business cycle
9
Q
What are fiscal/monetary policies intended to do
A
smooth the business cycle
