business cycle Flashcards
definition of the business cycle
the business cycle is a regular oscillation of economic activity.
what happens in a boom?
high confidence, construction, interest rates, consumption, investment, profitibility, inflation, durables, imports, wages and employment but low savings and inventories
what happens in a downswing?
rising interest rates, low consumption and investment, uncertainty, lower employment and wages, high production costs, debt, inflation, low govt spending, decrease in confidence
what happens in a trough?
high unemployment, low confidence, low investment, low consumption, low interest rates, hgh savings, low inflation, low demand for labour, negative GDP growth, low govt rev
what happens in an upswing?
low interest rates, increasing investment and consumption, expansionary fiscal policy, less debt, discounts, increasing confidence, higher share prices, construction
what are leading indicators?
indicate changes before they happen
what are coincident indicators?
indicates what is happening in the economy currently
what are lagging indicators?
indicate changes after an economic trend has been established
what are the two approaches to measuring GDP?
income and earnings approach and the expenditure approach
what is the income and earnings approach?
where all incomes are added, allowing for depreciation of capital equipment and net indirect taxes
what is the expenditure approach?
measuring using this apprach involves measuring the total expenditure on final goods and services produced by the four major sectors of the economy
defintion of aggregate expenditure
the total amount that firms and households plan to spend on goods and services at each level of income
what is the aggregate expenditure equation?
AE = C + I + G + (X-M)
what are the four components of aggregate expentiture?
consumption
investment
government expenditure
net exports
how does disposable income effect consumption?
there is a positive relationship
how does interest rates effect consumption?
low interest rates have a positive effect as less repayments and opportunity cost of spending decreases but high interest rates cause a pause in consumption
how does household stock of wealth effect consumption?
feel wealthier when their assests rise so they spend more
how do expectations effect consumption?
expectations are positive or negative sentiments people have about the future state of the economy and depending on their expectations they will spend or not
how does government policy effect consumption?
- monetary policy impacts interest rates, fiscal policy impacts spending decisions (taxation and govt spending)
how does interest rates effect investment?
there is an inverse relationship
how does profitability effect investment?
when profits are low firms may run down their capital over a longer period of time, when profits are high they have more to spend
how do business expectations effect investment?
if expectations are positive they will invest more, if not they will invest less
how do government policies effect investment?
monetary policy influences interest, fiscal policy impacts company tax
how does stabilisation of macroeconomic fluctuations effect government expenditure?
the govt takes considerable long term investment in infrastructure but it would be inappropriate to undertake one if the economy was at full capacity but if it was in a recession it would increase employment
