Lecture 2

Question 1

Describe how the business cycle can be presented grafically.

Answer 1

Question 2

How does GDP move in the long rung?

&

How does GDP move in the short to medium term?

What is this called?

Answer 2

In the long run: GDP tends to follow a trend path (”grow”!)

In the short to medium term GDP tends to fluctuate around the long term trend

The cyclical movement of GDP is labelled
the ”business cycle”

Question 3

What are some charateristics of an upswing in the economy?

Answer 3

• Output grows
• Profits grow (often fastern than output=
• Firms increase capital spending & hire workers
• consumers spend to much and save to little
• Inflation
• Asset price inflatio (high appetite for risk)
• interest rate increase

lead to new recession

Question 4

How is a recession defined?

Answer 4

Two successive quarters of real negative GDP growth

Question 5

What are the charateristics of a recession?

Answer 5

• Firms cut capital spending
• productivity growth declines
• profits fall
• firms lay off workers
• falling goods and asset price inflation