Business cycles and aggregate spending

Question 1

Business cycles are defined as

Answer 1

Periodic fluctuations in the rate of economic activity, as measured by levels of employment, prices and production

Question 2

Peak

Answer 2

The top of the cycle - productive capacity fully utilised, shortages may start to develop

Question 3

Recession

Answer 3

A downturn in activity. A recession is defined as a fall in real GDP for two successive quarters. Typically incomes and employment levels fall

Question 4

Trough

Answer 4

Characterised by high unemployment and low demand in relation to the capacity to produce. Business confidence is low

Question 5

Recovery

Answer 5

Characterised by raining incomes, employment and consumption. Business expectations become more optimistic and new investment projects are begun

Question 6

Autonomous (Exogenous) spending

Answer 6

Spending which is independent of current income

Question 7

Induced spending

Answer 7

Spending which rises with income

Question 8

Marginal propensity to consume =

Answer 8

∆C/∆Y where 0 < ∆C/∆Y < 1

Question 9

Average propensity to consume (APC) =

Answer 9

C/Y

Question 10

The linear consumption function

Answer 10

C = a + bY

Question 11

The savings function

Answer 11

S = -a + (1-b)Y

Question 12

Average propensity to consume

Answer 12

C/Y = a/Y + b

Question 13

Average propensity to spend

Answer 13

S/Y = -a/ Y + (1-b)