Econ Flashcards
Four stages of a business cycle
- expansion
- peak
- contraction (recession)
- trough (recessionary)
Characterization of expansion
- increasing consumer demand for goods and services
- increasing rate of inflation
- increasing industrial production generally leading to: decreasing unemployment rate, falling inventories, rising stock markets, rising property values, increasing GDP
Characterization of peaks
- decrease to the GDP growth rate
- decrease to the unemployment rate
- slowdown in hiring
- slower rate of growth and consumer spending and business investment
- increased to the inflation rate
Characterization of contractions/ recessions
- rising number of bankruptcies and bond defaults
- decreasing working hours and increasing unemployment rate
- decreasing consumer spending, home construction, and business investment
- falling stock markets
- decrease to the inflation rate
- rising inventories
- negative growth rate for the GDP
Characterization of troughs
- Change from negative to positive GDP growth rate
- High unemployment rate, increasing use of overtime in temp workers
- Possible increase in spending on consumer durable goods and housing
- Moderate or decreasing inflation rate
Cyclical industries
Highly sensitive to business cycles and inflation trends
Examples: heavy machinery, automobiles, raw materials like steel
Counter-Cyclical industries
Gold
Growth industries
Second phase of an industry’s life cycle, typically pays little to no dividends
Introduction > growth > maturity > decline
Example: social media, bioengineering
Defensive industries
Least affected by normal business cycles. Generally produce non-durable consumer goods
Examples include food, pharmaceuticals, tobacco, energy
Normal yield curve
Upward sloping (positive) - Long-Term interest rates are normally higher than short-term due to:
- time value of money
- reduced buying power of money resulting from inflation
- increased risk of default over long periods
- loss of liquidity associated with long-term investments
Yield spread
The difference in yields between treasuries and corporate bonds
Widen - pessimistic / recession
Narrow - optimistic / expansion
Inverted yield curve
Short-Term interest rates are more sensitive to Fed policy than long-term rates
