Module 1: Economic and Business Cycles Flashcards
Economics
Science that studies human behavior as the relationship between ends and scarce means that have alternative uses
Business Cycles
Rise and fall of economic activity relative to long-term growth
Gross Domestic Product
Total market value of all final goods and services produced within the borders of the nation
Nominal GDP
Measured in today’s prices… skewed by inflation
Real GDP
Measured in “base year” prices
Most commonly used measure of economic activity and national output
–(Nominal GDP / GDP Deflator) x 100
–GDP deflator = price index for all goods and services included in GDP
Real GDP per Capita
Compares standards of living
Economic Growth
Increase in Real GDP per capita over time
Expansionary Phase (1)
GDP ^
Employment ^
Peak (2)
High point of economic activity
End of expansionary phase…
–Corporate profits and growth decline
Contractionary Phase (3)
Falling economic activity and growth
–GDP and Employment decline
Trough (4)
Low point of economic activity
Excess production capacity, reduce workforce, cut costs
–Hesitant to invest because very risk aversive
Recovery Phase (5)
Profits begin to stabilize as demand for goods rises
Order of Phases (pnuemonic)
Every Peak Contracts Through Recovery
Recession
Two consecutive quarters of falling national output
Depression
Very severe recession
Aggregate Demand Curve
Downward sloping… inversely related
Aggregate Supply Curve
Upward sloping… Directly related
Reduction in Demand
Shifts left, profits decline… not due to price levels
Increase in Demand
Shifts right, profits increase… not due to price levels
Reduction of Supply
Shifts left, higher unemployment… not due to price levels
Increase in Supply
Shifts right, lower unemployment, increased workforce… not due to price levels
What makes AD Shift Right?
TWICEG
- Increase in wealth
- Decrease in real interest rates
- Confident economic outlook
- Depreciated currencies (cost of USD decreases, US goods become cheap, exports increase)
- Increase in Gov’t spending (expansionary)
- Decrease in consumer taxes (expansionary)
What makes AD Shift Left?
TWICEG
- Decrease in wealth
- Increase in real interest rates
- Uncertain economic outlook
- Appreciated Currencies (cost of USD increases, US goods become expensive, exports decrease)
- Decrease in Gov’t spending (Contractionary)
- Increase in Consumer taxes (Contractionary)
Multiplier Effect
Increase in spending produces a multiplied increase in the level of economic activity
– [1 / (1 - MPC)]
