LO 7.1.3: Determine the business cycle phase on the basis of an economic activity or statistical trend.

Question 1

What is the business cycle?

Answer 1

Reflects movements in economic activity and illustrates concepts of supply and demand.

Question 2

What is the purpose of analyzing characteristics of past economic conditions?

Answer 2

Since the economy is usually in either an expansion or contraction phase, economists can pinpoint when the expansion has reached its peak (top or maximum), and when the contraction phase has reached its trough (bottom).

Question 3

What happens to consumer demand during periods of economic expansion?

Answer 3

Rising

Question 4

What happens to consumer demand during periods of economic contraction?

Answer 4

Falling

Question 5

What happens to income during periods of economic expansion?

Answer 5

Rising

Question 6

What happens to income during periods of economic contraction?

Answer 6

Falling

Question 7

What happens to sentiment during periods of economic expansion?

Answer 7

Rising

Question 8

What happens to sentiment during periods of economic contraction?

Answer 8

Falling

Question 9

What happens to consumer credit during periods of economic expansion?

Answer 9

Rising

Question 10

What happens to consumer credit during periods of economic contraction?

Answer 10

Falling

Question 11

What happens to retail sales during periods of economic expansion?

Answer 11

Rising

Question 12

What happens to retail sales during periods of economic contraction?

Answer 12

Falling

Question 13

What happens to auto sales during periods of economic expansion?

Answer 13

Rising

Question 14

What happens to auto sales during periods of economic contraction?

Answer 14

Falling

Question 15

What happens to mortgage debt during periods of economic expansion?

Answer 15

Rising

Question 16

What happens to mortgage debt during periods of economic contraction?

Answer 16

Falling

Question 17

What happens to housing starts during periods of economic expansion?

Answer 17

Rising

Question 18

What happens to housing starts during periods of economic contraction?

Answer 18

Falling

Question 19

What happens to inflation during periods of economic expansion?

Answer 19

Falling

Question 20

What happens to inflation during periods of economic contraction?

Answer 20

Rising

Question 21

What happens to unemployment during periods of economic expansion?

Answer 21

Falling

Question 22

What happens to unemployment during periods of economic contraction?

Answer 22

Rising

Question 23

What happens to CPI during periods of economic expansion?

Answer 23

Falling

Question 24

What happens to CPI during periods of economic contraction?

Answer 24

Rising

Question 25

What happens to GDP during periods of economic peak?

Answer 25

Rising

Question 26

What happens to GDP during periods of economic trough?

Answer 26

Falling

Question 27

What happens to Producer Price Index during periods of economic peak?

Answer 27

Rising

Question 28

What happens to Producer Price Index during periods of economic trough?

Answer 28

Falling

Question 29

What happens to inflation during periods of economic peak?

Answer 29

Rising

Question 30

What happens to inflation during periods of economic trough?

Answer 30

Falling

Question 31

What happens to output during periods of economic peak?

Answer 31

Rising

Question 32

What happens to output during periods of economic trough?

Answer 32

Falling

Question 33

What happens to industrial production during periods of economic peak?

Answer 33

Rising

Question 34

What happens to industrial production during periods of economic trough?

Answer 34

Falling

Question 35

What happens to capacity utilization during periods of economic peak?

Answer 35

Rising

Question 36

What happens to capacity utilization during periods of economic trough?

Answer 36

Falling

Question 37

What happens to labor productivity during periods of economic peak?

Answer 37

Falling

Question 38

What happens to labor productivity during periods of economic trough?

Answer 38

Rising

Question 39

What happens to efficiency during periods of economic peak?

Answer 39

Falling

Question 40

What happens to efficiency during periods of economic trough?

Answer 40

Rising

Question 41

What is a recession?

Answer 41

A recession occurs when the GDP has experienced a decrease in real terms for two consecutive quarters or a minimum of six months from a baseline of zero.

Question 42

What are characteristics of a recession?

Answer 42

1. High unemployment,
2. Reduction in manufacturing,
3. Increases in inventory of durable goods,
4. A decline in GDP,
5. Contractions in corporate profits, and
6. Lower consumer spending.

Question 43

What is a depression?

Answer 43

A depression is when the GDP has experienced a decrease in real terms for six consecutive quarters or a minimum of 18 months from a baseline of zero.

Question 44

What are the 3 types of economic indicators?

Answer 44

• Leading;
• Coincident;
• Lagging or confirming.

Question 45

Leading indicator

Answer 45

Tend to precede actual economic change.

Question 46

What are examples of leading indicators?

Answer 46

• housing starts,
• new claims for unemployment,
• bond yields (spread between 10-year T-bonds and fed funds),
• indexes of stock prices,
• orders for durable goods, and
• changes in investor sentiment.

Question 47

Coincident indicators

Answer 47

• Occur simultaneously during the business cycle

* Confirm the stage that the economy is currently experiencing

Question 48

What are examples of coincident indicators?

Answer 48

• Industrial production,
• Level of personal income, and
• Amount of corporate profits

Question 49

Lagging (or confirming) indicators

Answer 49

Usually change after the economy has passed through one business cycle and allow confirmation of a previous economic environment

Question 50

What are examples of lagging (or confirming) indicators?

Answer 50

• Prime interest rates,
• Changes in CPI, particularly for services,
• Amount of business and consumer loans outstanding, and
• Average duration of unemployment.