Economic & Business Cycles, Measures, and Indicators

Question 1

Macroeconomics

Answer 1

The study of the economy as a whole. It examines the determinants of national income, unemployment, inflation and how monetary and fiscal policies affect economic activity

Question 2

GDP (Gross Domestic Product)

Answer 2

• The total market value of all final goods and services (excluding used goods that have been resold) produced within the borders of a nation in a particular period
• The most common measure of economic activity
• The nation’s output of goods and services
• Includes all final goods and services produced by resources within a country regardless of who owns the resources (ex: U.S. GDP includes the output of foreign owned factories in the US but excludes the output of US owned factories operating abroad)

Question 3

Coincident Indicators

Answer 3

• change at approx. the same time as the whole economy, thereby providing info about the current state of the economy
• may be used to identify, after the fact, the timing of peaks and troughs in a business cycle
• includes industrial production, manufacturing and trade sales, industrial production and personal income less transfer payments

Question 4

What does expansionary fiscal policy entail?

Answer 4

• more government spending and/or reductions in taxes
• more money devoted to national programs and activities leads to increased production, lower unemployment and higher consumer spending
• decreased taxes result in higher net income and profits, increased compensation, higher dividends paid out and more income to invest in profitable projects

Question 5

What does a contractionary fiscal policy entail?

Answer 5

• reduced government spending and increases in taxes (more consumption dollars are being used up to pay taxes)
• less gov spending leads to a decrease in production, higher unemployment and lower consumer spending
• increased taxes result in less net income, decreases in compensations, less dividends paid out and less investment in the market

Question 6

What is the required reserve ratio?

Answer 6

• dictates how much money a bank is required to hold in its vault or on deposit with a Federal Reserve bank
• higher ratio decreases the money supply and economic growth
• lower ratio increases the money supply and economic growth

Question 7

What is a quota in terms of trade control?

Answer 7

• they are limits on the quantity of a good that can be imported over time
• helps protect industries that may be relatively new or vulnerable to foreign competition
• absolute quotas set a maximum limit on the amount of a good that can be imported and tariff-rate quotas add an additional tax when the limit is reached

Question 8

What is “dumping”?

Answer 8

• when foreign firms want to enter a specific market or when they want to sell off excess goods, they will sell their goods below FMV and below the prices that domestic producers charge
• when the price charged to foreign customers on exported goods is less than either the price charged in the domestic market or less than the production cost
• quotas and tariffs help prevent this from happening

Question 9

What are advantages of trade controls?

Answer 9

• can protect specific industries and workers
• give new or struggling domestic industries an opportunity to be successful
• shields industries that are crucial to national defense

Question 10

What are disadvantages of trade controls?

Answer 10

• potential detriment to the world economy
• limitations on free trade
• potential restrictions on foreign entities that operate more efficiently than their domestic counterparts