Economic Fluctuations Flashcards
Recession definiton
A fall in real gdp for two consecutive quarters
What are economic expansions
Periods between recessions
What are the three key properties of economic fluctuations
Co-movement of many macroeconomic variables
Limited predictability of fluctuations
Persistence in the rate of economic growth
What variables move pro cyclically (together with) real GDP
real consumption, real investment and employment
What variable moves counter cyclically (opposite) with real GDP
Unemployment
Give three examples of why the labour demand curve would shift to the left
A fall in output demand
A decrease in labour productivity
A rise in input prices
What are the three different schools on the sources of economic fluctuations
Real business cycle theory
Keynesian theory
Financial and monetary theory
How does the real business cycle theory cause economic fluctuations
Technological advances and other productivity-enhancing innovation causes expansions
How does Keynesian theory account for economic fluctuations
Focuses on changes in expectations in the future. Animal spirits can lead to decreases in spending (recession) or increases in spending (expansions)
What are animal spirits
The psychological factors that lead to changes in business’ or consumer mood or sentiment.
How does monetary theory account for economic fluctuations
Looks at changes in price and interest. A decrease in money supply will cause the price level to fall. A fall in price level will reduce employment due to downward wage rigidity.
What does a multiplier do
Amplifies the effects of an economic shock, regardless of its source
What is the government expenditure multiplier
the $m change in GDP resulting from a $1 change in government expenditures
What is ‘crowding out’
Occurs when rising government expenditures partially or even fully displace expenditures by households or firms
