Chapter 8: Business Cycles

Question 1

Define persistence in a business cycle

Answer 1

The tendency for declines in economic activity to be followed by further declines, and the tendency for expansions to be followed by further expansions.

Question 2

What happens when persistence breaks?

Answer 2

Turning point in the business cycle, either a trough or peak

Question 3

What ended the Great Depression?

Answer 3

WW2, which greatly boosted economic activity and drastically decreased the unemployment rate to 2%

Question 4

What does it mean for a variable to be: procyclical? countercyclical? acyclical?

Answer 4

Moves with the business cycle, moves against the business cycle, does not move the business cycle

Question 5

What has changed about business cycles recently?

Answer 5

They now tend to be synchronous

Question 6

Define seasonal cycles

Answer 6

Fluctuations arising from seasonally linked behaviour i.e crop planting, agricultural output.

Question 7

Name the 3 main retail sales seasonal cycles

Answer 7

Christmas, Easter, Halloween

Question 8

What is one fact about the business cycle that is also the best indicator of an impending downturn?

Answer 8

Every business cycle downturn is always accompanied by an inversion in the yield curve

Question 9

State the two major explanations for fluctuations in the business cycles

Answer 9

Classical vs Keynesianism,
Classical: quick adjustment, wages are quick to adjust and the economy always rapidly returns to full employment. Keynesian: prices are sticky, and in times of recession, the government needs to intervene.
Causes of cycles:
Classical: Supply shocks
Keynesianism: Both supply and demand shocks