Chapter 12: Short-Run Fluctuations

Question 1

Economic fluctuations or Business cycles

Answer 1

Are short run changes in the growth of GDP.

Question 2

What is a recession?

Answer 2

An episode of negative economic growth.

Question 3

What is an expansion?

Answer 3

A period of positive growth. Expansions are periods between recessions.

Question 4

NBER?

Answer 4

National Bureau of Economic Research that defines expansions and recessions.

Question 5

Economic Fluctuations has three key properties.

Answer 5

• Co-movement of many macroeconomic variables
• Limited predictability of fluctuations
• Persistence in the rate of economic growth

Question 6

What moves positively with real GDP? (Goes up ?)

Answer 6

Real consumption, real investment , and employment.

Question 7

What moves negatively with GDP:

Answer 7

Unemployment

Question 8

How do aggregate macro variables grow on contract?

Answer 8

They do this during booms and busts exhibiting a pattern of positive or negative co movement .

Question 9

What happens since recessions and expansions do not follow a repetitive easily predictable pattern?

Answer 9

it is impossible to forecast during an expansion when the expansion or recession is going to end .

Question 10

Even through the beginnings and ends of recession are unpredictable

Answer 10

economic growth is not random but persistent.

Question 11

At the beginning of a recession the labor demand curve shifts to the left because

Answer 11

• Fall in output prices
• Decrease in output demand
• Decrease in labor productivity
• rise in input prices

Question 12

In the case of a recession , if the wages are flexible what will happen?

Answer 12

A leftward shift in the labor demand curve will happen and lead to a fall in wages and a decrease in the quantity of labor , GDP will decrease.

Question 13

If wages are downward right, the leftward shift in the labor curve will lead to ?

Answer 13

No change in the wage rate and a larger decrease in the quantity of labor.

Question 14

As a result of no change in the wage rate and a decrease in the quantity of labor what will happen?

Answer 14

Result output will decrease more under downward rigid wages than under flexible wages and GDP will decrease by even more.

Question 15

What are the three different schools of though on economic fluctuations?

Answer 15

• Real business cycle theory
• Keynesian theory
• Financial and monetary aid

Question 16

Real business cycle theory

Answer 16

Emphasizes changes in productivity and technology. Technological advances and other productivity enhancing innovation that cause expansions.

Question 17

Keynesian Theory

Answer 17

Focuses on change in expectations of the future. Animal spirits are the psychological factors the lead to changes in business and consumer mood or sentiment . Animal spirits can lead to decreases in spending or increases in spending .

Question 18

Financial and Monetary Theory

Answer 18

Whose main proponent is Milton Friedman looks at changes in prices and interest rates.

Question 19

A decrease in the money supply (m2)

Answer 19

Will cause the price level to fall and also cause an increase in the real interest rate

Question 20

A fall in the price level will?

Answer 20

Reduce employment because of downward wage rigidity.

Question 21

What will higher interest rates do ?

Answer 21

Reduce investment spending by firms.

Question 22

What are multipliers?

Answer 22

Things that can amplify the effects of any economic shock regardless of its sources.

Question 23

What is the cycle of multipliers ?

Answer 23

Consumption fails, the firms revenues fall which causes labor demand to fall. Layoffs happen and unemployment rises. Then household income falls.

Question 24

How can multipliers reduce labor demand?

Answer 24

By a fall in asset prices, A rise in mortgage defaults , A rise in household and firm bankruptcies.

Question 25

The leftward shift in labor supply has an impact when ?

Answer 25

If the new market clearing wage is above the original wage rate.

Question 26

What factors led the the 2007 housing crisis?

Answer 26

A fall in housing prices, which caused a collapse in new construction. Spiraling mortgage defaults making the entire financial system freeze up