Chapter 16 Flashcards
how volatile are components compared to GDP?
Investment, exports and imports are more volatile
private consumption about the same volatilty as GDP
gov consumption is more stable than GDP and not strongly correlated
what is real business theory? what does it imply?
explains the business cycle as a result of changes in production possibilities when technology improves it becomes more profitable to work and invesr and consumers feel richer so they consume more. Implies a positive correlation between I + C + production and hours worked. also that investment more volatile than consumption
what did John Maynard Keynes emphasise?
changes in moods - animal spirits - as a key factor driving fluctuations
what 3 amplification mechanisms magnify the effects of shocks?
multiplier effect
accelerator effect
financial accelerator
what is the multiplier effect?
when production and income increases consumers increase their consumption which leads to a further increase in AD
what is the accelerator effect?
when AD increases and demand is expected to remain high it becomes more profitable to invest and higher investment leads to a further increase in AD
what is the financial accelerator?
when production increases firms make more profits so it becomes easier to finance investment by retained earnings. leading to a further boost of AD
what should the government do if business cycles are driven by changes in production possibilities?
there is little reason for the government to try to counteract business cycles
what components can production be divided into? what do they represent?
what can trend be estimated as? what does it mean?
linear trend for the log of GDP
trend value is assumed to grow at a constant rate for the whole data period
and GDP will always return to the trend independent of shocks
what is the hodrick prescott filter?
fits a smooth curve through the time series for log (GDP)
what does a stochastic trend allow for?
random shocks to have permanent effects on GDP
what other variables can be decomposed into trend and cycle?
deviations from trend in private consumption, investment, EX + IM are all positvely correlated with deviations from the trend of real GDP
