Lecture 08 # Trade Cycle

Question 1

What is National Income?

Answer 1

Total value of all goods and services produced within a country’s borders in a specific time period, including wages, profits, rents, and taxes minus subsidies.

Question 2

What is Personal Income?

Answer 2

Total earnings received by individuals, including wages, rents, interest, and profits.

Question 3

What is Disposable Income?

Answer 3

Money available to households after deducting taxes from personal income.

Question 4

Define Aggregate Demand.

Answer 4

Total quantity of goods and services demanded in an economy, the sum of consumption, investment, government spending, and net exports.

Question 5

Define Aggregate Supply.

Answer 5

Total quantity of goods and services that producers are willing and able to supply at a given price for a specific period.

Question 6

What is GDP (Gross Domestic Product)?

Answer 6

Total monetary value of all finished goods and services produced within a country’s borders in a specific time period.

Question 7

What is NNP (Net National Product)?

Answer 7

GNP minus depreciation (capital consumption), reflecting the total monetary value of goods and services produced by a country’s residents.

Question 8

What is GNP (Gross National Product)?

Answer 8

Total monetary value of all finished goods and services produced by a country’s residents, both domestically and abroad.

Question 9

How can full employment be achieved through Aggregate Demand?

Answer 9

Full employment can be achieved by increasing Aggregate Demand through fiscal policies like tax cuts or increased government spending, which encourages higher production and employment.

Question 10

What is a Deflationary Gap?

Answer 10

A deflationary gap occurs when actual output is below potential output, leading to unemployment and downward pressure on prices or deflation.

Question 11

What is an Inflationary Gap?

Answer 11

An inflationary gap occurs when actual output exceeds potential output, leading to upward pressure on prices or inflation.

Question 12

What is the Consumption Function?

Answer 12

It shows the relationship between total consumption and disposable income, typically expressed as
C= a + b ⋅Y d
​
Where ‘a’ is autonomous consumption and ‘b’ is the marginal propensity to consume (MPC), ‘Yd’ is disposable income.

Question 13

What is the Investment Function?

Answer 13

The investment function describes the relationship between investment (I) and its determinants, such as interest rates and income levels, typically expressed as
I = I (autonomous) + I (induced).

Question 14

What is Autonomous Investment?

Answer 14

Definition: Investment that is independent of income or output levels.
Example: Government spending on infrastructure, regardless of economic conditions.

Question 15

What is Induced Investment?

Answer 15

Definition: Investment that varies with income or output.
Example: Businesses expanding production as demand increases.

Question 16

What is the Saving Function?

Answer 16

It describes the relationship between saving and disposable income, typically expressed as S= a + b ⋅ Yd
​
Where ‘a’ is autonomous saving and ‘b’ is the marginal propensity to save (MPS), ‘Yd’ is disposable income.

Question 17

What is the Circular Flow of Income?

Answer 17

It describes the continuous flow of money and goods between households and firms, where firms produce goods/services, and households spend income on these goods/services, forming a continuous cycle.

Question 18

What is Marginal Propensity to Consume (MPC)?

Answer 18

The proportion of additional income that is spent on consumption, typically expressed as MPC=ΔC/ΔYd

Question 19

What is Marginal Propensity to Save (MPS)?

Answer 19

The proportion of additional income that is saved, typically expressed as
MPS=1−MPC.

Question 20

What is Average Propensity to Consume (APC)?

Answer 20

The proportion of total income that is spent on consumption, typically expressed as
APC = C / Yd

Question 21

What is Average Propensity to Save (APS)?

Answer 21

The proportion of total income that is saved rather than spent on consumption, typically expressed as APS = S / Yd

Question 22

What is the Multiplier Effect?

Answer 22

The ratio of change in income to the initial change in spending that brought it about. It is calculated as
Multiplier=1/(1−MPC).

Question 23

What is the Marginal Efficiency of Capital (MEC)?

Answer 23

The expected rate of return on an additional unit of capital investment.

Question 24

What is Business Cycle?

Answer 24

The business / trade cycle refers to the fluctuations in economic activity that an economy experiences over time, consisting of periods of expansion and contraction.

Question 25

What are the stages of the Business Cycle?

Answer 25

STAGES OF BUSINESS CYCLE:
1. Expansion/Boom
2. Peak
3. Contraction/Recession
4. Trough/Depression

Question 26

Explain Expansion / Boom in Business Cycle.

Answer 26

1. Expansion/Boom:
   
   • Growing economic activity, high employment, and consumer spending.
   • Causes: High confidence, increased demand, and favorable conditions.

Question 27

Explain Peak in Business Cycle.

Answer 27

2. Peak:
   
   • Economic activity at its highest, full employment, and production.
   • Causes: Full resource utilization and peak confidence.

Question 28

Explain Contraction/Recession in Business Cycle.

Answer 28

3. Contraction/Recession:
   
   • Economic slowdown, declining GDP, rising unemployment.
   • Causes: Decreased demand, Economic imbalances, or external shocks.

Question 29

Explain Trough / Depression in Business Cycle.

Answer 29

4. Trough / Depression:
   
   • Lowest economic activity, high unemployment, and reduced production.
   • Causes: Economic adjustments, imbalances correction, and increased government intervention.

Question 30

What are the causes of Business Cycles?

Answer 30

Causes of business cycle include demand-side shocks, supply-side shocks, financial factors, government policies, and external shocks.