LM 2: Understanding Business Cycles

Question 1

What is a business cycle?

Answer 1

refers to economic fluctuations between periods of expansion and contraction.

Question 2

What are 3 types of cycles? CGG

Answer 2

1. classical cycle
2. growth cycle
3. growth rate cycle

Question 3

What are the 4 phases of a business cycle? RESC

Answer 3

1. recovery
2. expansion
3. slowdown
4. contraction

Question 4

What is a classical cycle?

Answer 4

the fluctuations in the level of economic activity relative to GDP

Question 5

What is growth cycle?

Answer 5

growth cycle refers to fluctuations in economic activity around the long-term potential or trend growth level.

Question 6

What is growth rate cycle?

Answer 6

growth rate cycle refers to fluctuations in the growth rate of economic activity. the peaks and troughs tend to occur before growth cycle

Question 7

During the recover phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.

Answer 7

inflation: moderate

employment: layoffs slow, but no new hiring

activity levels consumers & businesses: below potential but start to increase

description: economy going through trough

Question 8

During the expansion phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.

Answer 8

inflation: picks up

employment: full time rehiring, unemployment falls

activity levels consumers & businesses: above average growth rates

description: economy enjoying upswing

Question 9

During the slowdown phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.

Answer 9

inflation: accelerates

employment: hiring slows, unemployment falls

activity levels consumers & businesses: above average activity decelerating, move to below average growth rates

description: economy going through peak

Question 10

During the contraction phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.

Answer 10

inflation: decelerates with lag

employment: first cut hours then layoffs, unemployment increase

activity levels consumers & businesses: below potential, growth is lower than normal

description: economy weakens & may go into recession

Question 11

What is credit cycle?

Answer 11

describes the phases or ease of access to credit by borrowers based on economic expansion and contraction

Question 12

What are the 3 benefits of credit cycles to investors? UAA

Answer 12

1. Understand developments in the housing and construction markets
2. Assess the extent of business cycle expansions and contractions, particularly the severity of a recession if it coincides with the contraction phase of the credit cycle
3. Anticipate policymakers’ actions

Question 13

Why are companies reluctant to fire employees during temporary economic downturns?

Answer 13

because they may need them back

Question 14

During the recover phase what happens to interest rates, and capital spending?

Answer 14

low interest rates support investment

capital spending low but increasing

Question 15

During the expansion phase what happens to investments, earnings, and cash flows; and what is capital spending like?

Answer 15

increased investment spending supported by growth in earnings and cash flow

capital spending: focus on expansion, new types of equipment to meed demand

Question 16

During the slowdown phase what happens to business conditions and capital spending?

Answer 16

peak business conditions with health cash flows

capital spending: new orders continue as companies operate at or near capacity

Question 17

What are business conditions and capital spending in contraction phase?

Answer 17

fall in demand, profits, and cash flows

capital spending: existing orders cancelled, scale back, companies stop placing orders

Question 18

What is the importance of consumer confidence?

Answer 18

reflects the expectations of future incomes and employment

Question 19

What happens to imports and exports when currency appreciates and is more valuable than other countries?

Answer 19

imports increase when currency appreciates

exports decrease when currency appreciates

Question 20

What is difference between durable and non-durable goods ?

Answer 20

Durable goods provide a stream of services or utility over time. In contrast, non-durable goods and services tend to be consumed immediately.

durable eg. car, washer

non-durable eg. food

Question 21

What are economic indicators?

Answer 21

variables that provide information on the state over overall economy

Question 22

What are the 3 types of economic indications, describe them? LCL

Answer 22

1. leading: are useful for predicting the future state of the economy.
2. coincident: help identify the current economic state.
3. lagging: help identify past economic conditions.

Question 23

What is a composite indicator?

Answer 23

Composite indicators include several different variables that tend to move together.

Question 24

What are 2 reasons analyst study various economic indicators? IL

Answer 24

1. identify the current business cycle phase
2. likely trajectory of the economy

Question 25

What are the 3 main conductors of survey’s? CRS

Answer 25

1. central banks
2. research institutes
3. statistical offices

Question 26

What is nowcasting?

Answer 26

Nowcasting is the process of estimating the current state (think “now” + “forecasting”), and the produced estimate is known as a nowcast

Question 27

What is GDP now?

Answer 27

viewed as best running estimate of real GDP growth

Question 28

What is the diffusion index?

Answer 28

diffusion index consists of different leading, coincident, and lagging indicators.