Short-term economic fluctuations Flashcards
How do economists decide whether the economy is in a recession?
Simply put, it’s when the economy is performing poorly. Some characteristics include unemployment increasing rapidly and slowed down inflation.
What is the business cycle?
It is a term used to describe the tendency for the economy to go through periodic bursts of good economic performance followed by periods of poor economic performance. This cycle repeats.
What are the two ways of representing the business cycle?
The two ways are:
- The classical cycle: This way of looking at the business cycle focuses on the movements in the levels of real GDP.
- The growth cycle: Instead of just magnitude, time as a factor is introduced and it focuses on how quickly the level of GDP has grown over time (rather than just troughs and peaks, or contractions and expansions). So expansions are periods of fast GDP growth, and contractions are period of slow GDP growth.
What are some ways of identifying a recession?
As a rule of thumb, a recession is two consecutive quarters of slow GDP growth.
Another way of seeing it includes high unemployment rate.
What caused the 1990s recession in Australia?
A lack of efficient inventory control by firms (so firms could not properly cater to the demand of the Australian people, lack of effective monetary policies, lack of openness to international trade (which does not provide healthy market competition).
What features seem to be common to most business cycle fluctuations in the economy?
Unemployment is a key indicator of the state of the business cycle as high unemployment rate is likely to mean a contraction.
For industries in particular:
- Industries that produce durable goods (like cars, houses and capital equipment or more affected). This is because you can always buy these things at a later date and save, and you most likely already own a durable good and the benefit of replacing that durable good doesn’t out weight the cost.
- Industries that provides services and non-durable goods are less likely to be affected significantly by short term fluctuations. This is because there’s always a demand for them, you can’t just wait until the economy is good to get a stylish hair cut for example. Seasonal fruits are similar, you have to get it in that season.
How are output gaps and unemployment related?
Output gaps are either expansionary or contractionary. Unemployment is usually associated with contractionary output gaps. The higher the contractionary gap, the higher unemployment is under utilisation of economic resources.
For what reasons might actual output sometimes grow quickly and slowly?
It grows quickly when economy is producing above its potential output. Slowly when below potential output. Above or below is based on demand, and demand is controlled by the wealth effect (and thus marginal propensity to consume). Whatever the case, it is inefficient use of economic resources.
What is the natural rate of unemployment?
Portion of total unemployment rate that is structural and frictional (can’t be helped). Can also be thought of as the unemployment rate when cyclical unemployment is 0 (i.e. economic resources are being used as efficiently as possible).
What is the significance of Okun’s law?
Each extra percentage point of cyclical unemployment is associated with an approximately 1.8% increase in the output gap (obviously measured in relation to potential output).
The equation is just to what degree potential output is being achieved (as a proportion) is equal to a proportional amount of cyclical unemployment.
So can be used to predict the effect of GDP in policies aimed at reducing unemployment, for example.
