Chapter 3: Business Cycles and Comovement

Question 1

What is the primary defining feature of business cycles?

Answer 1

They are fluctuations about the trend level in RGDP.

Question 2

4 important features of the deviations of trend from RGDP?

according to figure 3.2

Answer 2

1. Persistence
2. The time series from trend in RGDP is choppy.
3. No regularity in amplitude of fluctuations. Some of the peaks and troughs represent large deviations from trend and others represent small deviations.
4. No regularity in the frequency of fluctuations. The length of time between peaks and troughs in RGDP varies considerably.

Question 3

Explain why forecasting GDP over the LR is difficult.

Answer 3

Although business cycles are persistent (deviations tend to stick) in the SR, there is no regularity in amplitude and frequency, which makes it difficult to predict the economy in the LR.

Question 4

Why are the comovements in aggregate economics variables important?

Answer 4

When RGDP fluctuates, so do its macroeconomic components, this is called a comovement. When co-variables change, so does RGDP and this can help macroeconomists predict future changes in the economy.