Ch. 17 - Business Cycle

Question 1

What is the business cycle?

Answer 1

Short-term fluctuations in economic activity

Question 2

What is potential output?

Answer 2

The level of output that occurs when all resources are fully employed

Question 3

What is an output gap? How do you measure it?

Answer 3

The difference between actual & potential output, measured as a percentage of potential output

Output Gap = ((Actual Output - Potential Output) / Potential Output) X 100

Question 4

What does it mean when actual output < potential output?

What does it mean when actual output > potential output?

Answer 4

When Actual Output < Potential Output:
- Output gap is negative
- Called a recessionary gap
- Means idle resources, less jobs, corresponds with high unemployment

When Actual Output > Potential Output:
- Output gap is positive
- Called an inflationary gap
- Means economy is using resources with unsustainable intensity, people are working more, prices rise

Question 5

What is a peak?

What is a trough?

Answer 5

Peak: A high point in economic activity

Trough: A low point in economic activity

Question 6

What is a Recession?

What is an Expansion?

Answer 6

Recession: A period of declining economic activity

Expansion: A period of increasing economic activity

Question 7

Recessions are _____ and _____
Expansions are _____ and _____

a) long, gradual
b) short, sharp

Answer 7

b) Recessions are short and sharp

a) Expansions are long and gradual

Question 8

What are Leading Indicators?

What are Lagging Indicators?

Answer 8

Leading Indicators: Variables that tend to predict the future path of the economy

Lagging Indicators: Variables that follow the business cycle with a delay

Question 9

What is Okun’s Rule of Thumb?

Answer 9

For every percentage point that actual output falls below potential output, the unemployment rate is around 1/3 a percentage point higher

Question 10

What is seasonally adjusted data?

Answer 10

Data stripped of predictable seasonal patterns

Question 11

What is an annualized rate?

Answer 11

Data converted to the rate that would occur if the same growth rate had occurred throughout the year?

Question 12

What are revisions?

Answer 12

Updates on earlier estimates

Question 13

What are the Top 10 Economic Indicators?

Answer 13

1. Real GDP is the broadest measure of economic activity
2. Export data gives you indication about production in Canada’s big export sectors
3. The unemployment rate is an indicator of excess capacity
4. Payrolls tell you if the labour market is improving
5. Building permits tell you about construction
6. Capacity utilization provides an indicator of industrial slack
7. Retail sales tell you if consumers are confident & spending
8. The rate of inflation tells you what’s happening with prices
9. The labour cost index tells you what’s happening with wages
10. The stock market tells you about the future expected profits

Question 14

What are 5 tips for tracking the economy?

Answer 14

1. Tracking many indicators
2. Broad indicators beat narrow indicators
3. Seek just-in-time data & distinguish between leading & lagging indicators
4. Find the signal amid the noise
5. Adjust your outlook when data differ from expectations