Business Cycles and Aggregate Spending Flashcards
What are business/trade cycles
Periodic fluctuations in the rate of economic activity
When were the first industrial cycles
1800-1860
How many cycles were there from 1800-1860 and what was the average length
14 cycles averaging 4.3 years in length
How many cycles were there from 1860-1914 and how long where they
7 cycles from 1860-1914 averaging 7.5 years in length
Why has the length of business cycles increased over time
Increased globalization and trade alongside declining impact of supply shocks due to better supply chain management
Both make it the economy more stable
What was the unemployment levels during the great depression and which industries were most effected
Unemployment reached 3 million in 1932 with shipbuilders worst affected (62%) alongside steelworkers (47.9%)
What were different economists response to the great depression
Robbins and Schumpeter argued the economy would recover by itself without government intervention
Churchill - spoke at treasury saying that the government couldn’t add much employment anyway
Keynes - schemes of national development are capable of curing unemployment
What does Keynes General Theory say would solve recession in the short run
Excess supply of output can prevail in the short run
What does short run mean in macroeconomics
A period over which there is a negative output gap
What assumptions are made about a short run model
Industrial structure of the economy is fixed
Firms output is aggregated into a single productive sector
Price level is fixed and all variables are measured in real terms
What is the consumption function and how is mpc calculated
C=a+bYd
Where a is autonomous consumption
b is the MPC calculated by the total change in C/ the total change in Y
Yd is disposable income
What is the average propensity to consume
C/Y and denotes that on average C and Y will change together
What is the savings function and how is it derived from AE
S = -a+(1-b)Yd
derived from the fact that AE = Y = C+S and then subbing in the consumption function
How is Investment related to interest
Negative correlation
What are the three main investments
Investment in inventory
Residential housing construction
Business fixed capital
