Module 15.1: Business Cycle Phases Flashcards
What are the four phases of a business cycle?
1) Expansion - real GDP is increasing
2) Peak - real GDP stops increasing and begins decreasing
3) Contraction or recession - real GDP is decreasing
4) Trough - real GDP stops decreasing and begins increasing
Explain how the ratio of inventory to sales can be an indicator of the business cycle?
an increase in inventory sales ratio above its normal level can indicate the expansion is approaching its peak.
when a contraction is reaching its trough, inventory to sales ratio is lower than normal levels.
What are the four determinants of level of economic activity in the housing sector?
1) Mortgage rates - low interest rates tend to increase home buying and vice versa
2) Housing costs relative to income - high income compared to housing costs
3) Speculative activity - more frequent purchases based on expectations of future gians
4) Demographic factors - age of buying a home etc.
What are the most important factors determining level of countries imports and exports?
1) Domestic GDP growth
2) GDP growth of trading partners
3) Currency exchange rates
How does an exchange rate impact a countries imports and exports?
increase in value of currency makes its goods more expensive to foreign buyers and foreign goods less expensive.
What are the 4 characteristics of a Trough?
1) GDP growth rate changes from negative to positive
2) High unemployment rate, increase use of overtime and works
3) Spending on consumer durable goods and housing may increase
4) Moderate or decreasing inflation rate
What are the 5 characteristics of a Expansion?
1) GDP growth rate increases
2) Unemployment rate decreases as hiring accelerates
3) Investment increases in producers’ equipment and home construction.
4) Inflation rate may increase
5) Imports increase as domestic income growth accelerates
What are the 4 characteristics of a Peak?
1) GDP growth rate decreases
2) Unemployment rate decreases but hiring slows
3) Consumer spending and business investment grow at slower rates
4) Inflation rate increases
What are the 5 characteristics of a Contraction?
1) GDP growth rate is negative
2) Hours worked decrease, unemployment rate increases
3) Consumer spending, home construction, and business investment decrease
4) Inflation rate decreases with a lag
5) imports decrease as domestic income growth slows
What do Neoclassical School economists believe drives shifts in AD and AS? What do they conclude about business cycles?
primarily driven by changes in technology over time.
Business cycles are just temporary deviations from long-run equilibrium.
What do Keynesian school economists beleive causes shifts in AD and AS? What do they conclude about business cycles?
primarily driven by changes in expectations and shifts in optimisim of those who run businesses.
Keynesian school beleives wages are “downward sticky” and only way to recover from a contraction is through monetary policy and fiscal policy
What did the New Keynesian School add?
same as Keynesian school economists, but also that prices of productive inputs are “downward sticky” in addition to wages.
What do Monetarist school economists believe causes shifts in AD and AS? What do they conclude about business cycles?
primarily driven by variations in the rate of growth of money supply due to inappropriate decisions by the monetary authorities.
Cycles can by fixed by keeping AD stable and growing and central bank should follow a policy of steady predictable increases in the money supply.
What do Austrian school economists believe causes shifts in AD and AS? What do they conclude about business cycles?
caused by government intervention in the economy.
What do New classical school economists believe causes shifts in AD and AS? What do they conclude about business cycles?
Changes in technology and external shocks cause business cycles.
They believe policymakers should not counteract business cycles as they are responses to real external shocks.
