September 30, 2019

Question 1

Define Business Cycle.

Answer 1

It is the fluctuations about the trend in real GDP (deviations from trend) Look at image in notes.

Question 2

What are the characteristics of the business cycle(4)

Answer 2

1. Amplitude: tells you how deep the cycle is (positive or negative) 2. Peak-Trough: highest and lowest turning points of the business cycle 3. Boom: Series of positive deviations from trend culminating in a peak 4. Recession: Series of negative deviations from trend culminating in a trough

Question 3

What does a Short Run SR resistance state about business cycle?

Answer 3

It states that deviations of real GDP from trend are persistent: when real GDP is above (below) trend, it tends to stay there for a few quarters.

Question 4

List the 4 reasons why business cycles are irregular.

Answer 4

1. The time series of deviations from trend in real GDP are choppy. (Look at note.) 2. There is no regulating in the amplitude (size) of fluctuations (how deep it is)- there are mild and deep recessions. 3. There’s no regularity in the frequency of recessions (how often it occurs). It could be in 2 or 10 years. 4. How long it lasts isn’t regular.

Question 5

Define Comovement

Answer 5

Comovement means that many economic variables move together in a predictable way over the business cycle. Or the percentage deviation from trend of X,Y in each series. They can be positively or negatively correlated. That’s COV (X,Y)>0 or COV (X,Y)<0

Question 6

What is a procyclical variable? (COV>0)

Answer 6

It’s a variable whichs deviation from trend is positively correlated with the deviation from the trend in real GDP. e.g C, I, IM, Employment

Question 7

What is a countercyclical variable? (COV<0)

Answer 7

It’s a variable whichs deviation from the trend is negatively correlated with the deviation from the trend in real GDP. e.g Unemployment

Question 8

What is an acyclical Variable? (C=0)

Answer 8

neither countercyclical or procyclical.

Question 9

What is the formula for a correlation coefficient?

Answer 9

p = COV (X,Y) / STD(X) * STD(Y)

Question 10

What is a leading variable?

Answer 10

A macrovariable that helps predict the future path of real GDP.

e.g residential investment

Xt-1 or t-2 = Leading variable ; Y_t = GDP today

Question 11

Define lagging variable?

Answer 11

A variable that real GDP helps predict its future path.

e.g unemployment rate

Question 12

Define coincident variable

Answer 12

Its a variable that neither lead not lags real GDP or shows current state of economy.

Question 13

For C,I, E and average labour productivity state whether these variable are procyclical, countercyclical, acyclical, a leading variable, lagging variable or a coincident variable.

Answer 13

C: procyclical (corr coeffi: 0.08); coincident, smoother than real GDP

I: procyclical (corr coeffi: 0.77); coincident, more volatile than real GDP

E: procyclical (corr Coeff: 0.08); lagging variable, less variable than real GDP

Average labour productivity = Y (GDP)/E ; coincident variable

need to ask teacher about this!!!