Module 1: Economic and Business Cycles

Question 1

Economics

Answer 1

Science that studies human behavior as the relationship between ends and scarce means that have alternative uses

Question 2

Business Cycles

Answer 2

Rise and fall of economic activity relative to long-term growth

Question 3

Gross Domestic Product

Answer 3

Total market value of all final goods and services produced within the borders of the nation

Question 4

Nominal GDP

Answer 4

Measured in today’s prices… skewed by inflation

Question 5

Real GDP

Answer 5

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

Question 6

Real GDP per Capita

Answer 6

Compares standards of living

Question 7

Economic Growth

Answer 7

Increase in Real GDP per capita over time

Question 8

Expansionary Phase (1)

Answer 8

GDP ^

Employment ^

Question 9

Peak (2)

Answer 9

High point of economic activity
End of expansionary phase…
–Corporate profits and growth decline

Question 10

Contractionary Phase (3)

Answer 10

Falling economic activity and growth

–GDP and Employment decline

Question 11

Trough (4)

Answer 11

Low point of economic activity
Excess production capacity, reduce workforce, cut costs
–Hesitant to invest because very risk aversive

Question 12

Recovery Phase (5)

Answer 12

Profits begin to stabilize as demand for goods rises

Question 13

Order of Phases (pnuemonic)

Answer 13

Every Peak Contracts Through Recovery

Question 14

Recession

Answer 14

Two consecutive quarters of falling national output

Question 15

Depression

Answer 15

Very severe recession

Question 16

Aggregate Demand Curve

Answer 16

Downward sloping… inversely related

Question 17

Aggregate Supply Curve

Answer 17

Upward sloping… Directly related

Question 18

Reduction in Demand

Answer 18

Shifts left, profits decline… not due to price levels

Question 19

Increase in Demand

Answer 19

Shifts right, profits increase… not due to price levels

Question 20

Reduction of Supply

Answer 20

Shifts left, higher unemployment… not due to price levels

Question 21

Increase in Supply

Answer 21

Shifts right, lower unemployment, increased workforce… not due to price levels

Question 22

What makes AD Shift Right?

TWICEG

Answer 22

• 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)

Question 23

What makes AD Shift Left?

TWICEG

Answer 23

• 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)

Question 24

Multiplier Effect

Answer 24

Increase in spending produces a multiplied increase in the level of economic activity
– [1 / (1 - MPC)]

Question 25

Change in Real GDP

Answer 25

Multiplier x Change in Spending

Question 26

What makes Short-Run Aggregate Supply Shift Right?

Answer 26

• Decrease in Input prices

- Supplies are plentiful

Question 27

What makes Short-Run Aggregate Supply Shift Left?

Answer 27

• Increase in Input prices

- Supplies are Curtailed