Chapter 14: Recessions, Expansions, and the Debate Over How to Manage Them

Question 1

Short term economic downturns typically characterized by declines in real GDP growth and increases in the unemployment rate

Answer 1

Recessions

Question 2

Recessions are caused by:

Answer 2

(1) Declines in AD
(2) Declines in SRAS
(3) Declines in LRAS structure

Question 3

In the long run, __________________ adjusts to bring the economy back to equilibrium

Answer 3

Short Run Aggregate Supply

Question 4

Declines in Aggregate Demand lead to:

Answer 4

Deflation

Question 5

Declines in aggregate supply can be caused by shifts in both _________ and __________ aggregate curves.

Answer 5

(1) Long run

(2) Short run

Question 6

Recessions caused by SRAS shifts occur when __________.

Answer 6

Input Costs Rise

Question 7

Great Recessions

Answer 7

• Longer in length than other recessions
• Deeper in effects than other recessions
• Significant problem in the financial market, similar to what happened during the Great Depression

Question 8

Official # of months in the recession?

Answer 8

18 months

Question 9

How many years to recover from recession?

Answer 9

4 years

Question 10

Long Run Aggregate Supply fell in the great recession due to:

Answer 10

(1) An institutional breakdown in the loanable funds market associated with the housing boom
(2) New federal regulations on banks in response to the breakdown

Question 11

Result of the institutional breakdown in the loanable funds market?

Answer 11

• Real estate values fell in 2007
• Mortgage backed security problems
• FED stepped in, in both ways and levels previously verboten
• Dodd’s Frank Act was placed

Question 12

The primary regulatory response to the financial turmoil that contributed to the Great Recession

Answer 12

Dodd’s Frank Act

Question 13

Effects of the Dodd’s Frank Act?

Answer 13

Increased consolidation in the banking industry

Question 14

Aggregate demand declined during the great recession. It was affected by the:

Answer 14

(1) Decrease in wealth (stocks, bonds, real estate)

(2) Decrease in expected income

Question 15

Great Recession in Numbers:

Answer 15

Pre Recession (Second Quarter of 2007):

• Unemployment was below 5%
• Real GDP was growing at 3.6%

Fourth Quarter of 2008 (During the Recession):

• Unemployment was 10%
• Real GDP declined at an annual rate of 8.9%

In 2012 (recession officially over):

• Real GDP was growing at a rate of less than 2%
• Unemployment remained at 8%
• World financial institutions remained fragile

Question 16

Aftermath of Great Recession

Answer 16

Led to a permanent loss of real GDP that the U.S. economy may never recover

Question 17

What were the main catalysts of the Great Recession when it began in Decemeber 2007?

Answer 17

Falling real estate prices

Question 18

Great Depression Statistics:

Answer 18

• Economy contracted by 30% from 1929 to 1933
• It took 7 years for real GDP to return to its pre recession level
• Unemployment was 2.2% in 1929 and 25% in 1933
• The unemployment rate was 15% for almost the entire decade of 1930’s

Question 19

Unemployment comparison between Great Depression and Great Recession

Answer 19

• The unemployment rate during the Great Depression reached 25% and stayed at 15% ten years after it started
• At it highest point, the unemployment rate in the Great Recession was 10%

Question 20

Great Depression Unique Conditions:

Answer 20

(1) Was two separate recessions (1929-1933 and 1937-1938)

(2) Prices across the economy fell throughout the decade. Deflation!

Question 21

What was the primary cause of the great depression?

Answer 21

Decrease in aggregate demand

Question 22

The Great Depression was caused by a decline in aggregate demand which was driven by:

Answer 22

(1) Decline in real wealth
(2) Decline in consumer and business confidence
(3) Three significantly flawed macroeconomic policies

Question 23

Three significantly flawed macroeconomic policies during the Great Depression:

Answer 23

(1) Decrease money supply
(2) Increase taxes
(3) Smoot-Hawley Tariff Act

Question 24

Encompasses governmental acts that influence the macroeconomy.

Answer 24

Macroeconomic Policy

Question 25

Two Types of Macroeconomic Policy:

Answer 25

(1) Fiscal Policy

(2) Monetary Policy

Question 26

Comprises the use of government’s budget tools to influence the macroeconomy

Answer 26

Fiscal Policy

Question 27

Involves adjusting the money supply to influence the macroeconomy (decrease money supply)

Answer 27

Monetary Policy

Question 28

Mistakes with the Fiscal Policy:

Answer 28

(1) They increased taxes in attempt to balance the federal government’s budget
(2) They passed a deeply protectionist trade bill called the Smoot Hawley Tariff Act (a prohibitive tariff)

Question 29

Mistakes with the Monetary Policy:

Answer 29

(1) The central bank (the FED) decreased the money supply

Question 30

Classical Economics

Answer 30

• Adjustment towards long run equilibrium will happen naturally
• Prices are flexible and must be allowed to adjust
• Let the economy go and the market will correct itself

Question 31

Keynesian Economics

Answer 31

• Adjustment will be long and occur unpredictably with many delays
• Prices are sticky
• Call for government interventions in the market

Question 32

Classical Economics believes the government is _______.

Answer 32

Self Correcting

Question 33

Policies of Classical Economics:

Answer 33

(1) Pro-market, laissez faire
(2) No significant role for government intervention in macroeconomic policy
(3) Focus on long-run growth

Question 34

John Maynard Keynes

Answer 34

• British economist
• The General Theory of Employment, Interest, and Money
• Theory of persistent cyclical unemployment
• Believed that wages are sticky downwards meaning that wages, by their nature, are very reluctant to ever decrease, even during terrible economic conditions
• High wages prevent labor markets reaching equilibrium and restoring full employment, creating a prolonged recession