business cycles Flashcards
long-run economic growth
rising productivity increases the average standard of living
short-run growth
inherent business cycle (periods of economic expansion and recession)
other measures of economic prosperity
health
increased lifespans
time spent on leisure
real gdp growth
(new year - previous year / previous year) x 100
estimating gdp over long periods
current real gdp = previous real gdp x (1+g)^t
rule of 70
nb of years to double = 70 / growth rate
labour productivity
nb of goods and services produced by one worker or by an hour of work
factors affecting labour productivity
increase in capital/ hr
tech change
property rights
potential gdp
level of real gdp attained when all firms are operating at capacity (normal hrs and normal-sized workforce)
financial system
system of financial markets and financial intermediaries through which firms acquire funds from households
financial markets
financial securities are bought and sold (stocks and bonds)
financial intermediaries
firms that borrow funds from savers and lend them to borrowers
key services of the financial system
risk sharing
liquidity (investment into cash)
information
expression for investment in a closed economy
I = Y - C - G
private saving
Sprivate = Y + TP - C - T
public saving
Spublic = T - G - TP
total saving
S = Y - C - G
conclusion (investment and saving)
I = S
the market for loanable funds
interaction of borrowers and lenders determining the market interest rate and nb of loanable funds exchanged
effects of interest rates
increase: more saving
decrease: more borrowing
effects of shifts
more savings or less borrowing = lower interest rates
less savings or more borrowing = higher interest rates
shift: increase in gov’s budget deficit
shift the supply of loanable funds to the left
increased real interest rates / decreased investment
shift: increase in desire of households to consume
shift supply curve to the left
increased real interest rates
decreased investment
shift: increase in tax benefits
increase incentive to save
shift supply curve to the right
increased real interest rates
decreased investment
shift: increase in expected future profits
shift demand curve to the right
decreased real interest rates and investment
shift: increase in corporate tax
shift demand curve to the left
decreased real interest rates and investment
crowding out
decline in private expenditures as a result of increases in government purchases
recession
decline in activity spread across the economy for more than a few months
two consecutive quarters of declining gdp
business cycle
- end of expansion: interest rates rising, wages rising faster than other prices, firm’s profits falling
- recession begins: decreased investment, households consume less, cut back employment, declines in spending
- economic conditions improve: firms and firms invest again and employment recovers
effect of the business cycle on inflation
rises towards the end of an expansion and fall over the course of each recession
effect of business cycle on unemployment
rises during recession and recovers
effect of business cycle on real gdp
annual fluctuations in real gdp was greater than before 1950
great moderation and factors that causes it
business cycles have been particularly mild since the mid-1980s
- increasing importance of services
- the establishment of unemployment insurance
- active federal gov stabilization policies
- increased stability of financial system
