Topic 6 Part 1

Question 1

What is a business cycle?

Answer 1

The repeated sequence of economic expansion giving way to temporary decline followed by recovery

Question 2

What are economists concerned with in terms of business cycles? (2)

Answer 2

(1) what causes business cycles and
(2) how policymakers should respond to them

Question 3

Where did business cycle research start?

Answer 3

National Bureau of Economic Research (NBER)

Question 4

Are business cycles recurrent or periodic?

Answer 4

Recurrent

Question 5

What is the book that outlines perfectly how business cycles work?

Answer 5

Measuring Business Cycles by A. Burns and W. Mitchell (1946)

Question 6

What are the 5 main points that Burns and Mitchell touch upon in their book?

Answer 6

✓Aggregate economic activity
✓Expansions and contractions
✓Comovement
✓The business cycle is recurrent, but not periodic
✓The business cycle is persistent

Question 7

What did Burns and Mitchell say about aggregate economic activity? (2)

Answer 7

Real GDP measures most closely aggregate economic activity.
However, it is important to look at other indicators of activity such as employment and financial market variables.

Question 8

What did Burns and Mitchell say about expansions and contractions?

Answer 8

Aggregate economic activity declines in a contraction or recession until it reaches a trough.
After a trough, activity increases in an expansion or boom until it reaches a peak.
The sequence from one peak to the next, or from one trough to the next, is a business cycle.

Question 9

What is a severe depression called?

Answer 9

A depression

Question 10

What does comovement mean?

Answer 10

The correlated or similar movement of two or more entities.
The tendency of many economic variables to move together in a predictable way over the
business cycle is called comovement

Question 11

What do Burns and Mitchell say about comovement?

Answer 11

Business cycles do not occur in just a few sectors or in just a few economic variables.
Instead, expansions and contractions occur at about the same time in many economic activities.

Question 12

What do Burns and Mitchell mean when they say the business cycle is recurrent, but not periodic?

Answer 12

Recurrent means the pattern of contraction–trough–expansion–peak occurs again and again.
Not being periodic means that it doesn’t occur at regular, predictable intervals.

Question 13

What do Burns and Mitchell mean when they say the business cycle is persistent?

Answer 13

The duration of a complete business cycle can vary greatly from a year to more than a decade and predicting it is difficult.
However, declines are followed by further declines; growth is followed by more growth

Question 14

What does procyclical mean?

Answer 14

An economic variable that moves in the same direction as aggregate economic activity.

Question 15

What does countercylical mean?

Answer 15

A variable that moves in the opposite direction to aggregate economic activity.

Question 16

What does acyclical mean?

Answer 16

Variables that do not display a clear pattern over the business cycle.

Question 17

What are the 3 timings of variables relative to aggregate economic activity called?

Answer 17

Leading
Coincident
Lagging

Question 18

What is a leading variable?

Answer 18

Variable tends to move in advance of aggregate economic activity (the peaks and troughs occur before the corresponding peaks and troughs in the business cycle)

Question 19

What are coincident variables?

Answer 19

Variable tends to move at the same time with aggregate economic activity (the peaks and troughs occur at the same time as the corresponding business cycle peaks and troughs).

Question 20

What is a lagging variable?

Answer 20

Variable tends to move after the aggregate economic activity (the peaks and troughs occur later than the corresponding business cycle peaks and troughs).

Question 21

What type of variable is production?

Answer 21

A coincident and procyclical variable

Question 22

What can be said about the cyclical sensitivity of production?

Answer 22

production in some sectors of the economy is greater that in others

Question 23

What type of goods that are produced respond strongly to business cycles?

Answer 23

Industries that produce relatively durable or long-lasting goods (houses, refrigerators, capital
goods) respond strongly to the business cycle.

Question 24

What type of variable is expenditure (Consumption and Investment)?

Answer 24

Coincident and procyclical

Question 25

What type of variable is investment inventory?

Answer 25

Procyclical and leading, and very volatile

Question 26

What type of variable is employment?

Answer 26

Coincident and procyclical variable

Question 27

What type of variable is unemployment?

Answer 27

Strongly Countercyclical and timing is unclassified

Question 28

What is mean by unemployments timing being unclassified?

Answer 28

It is leading in peaks and lagging in troughs

Question 29

What was the pattern of employment and unemployment in the three most recent recessions?

Answer 29

Employment growth stagnated, and unemployment
tended to rise for some time even after the recession’s trough was reached. This pattern led observers to refer to the recovery period following these recessions as “jobless recoveries”.

Question 30

What type of variable is average labour productivity?

Answer 30

Leading and procyclical variable

Question 31

Why is average labour productivity procylical?

Answer 31

In a recession, workers produce less output during each hour of work than they do in booms

Question 32

What type of variable is real wages?

Answer 32

Mildly procylical

Question 33

What type of variable is nominal money growth?

Answer 33

Leading and procyclical variable

Question 34

What type of variable is inflation?

Answer 34

procyclical but lagging

Question 35

Are financial variables sensitive to the business cycle?

Answer 35

Yes, they are sensitive

Question 36

What type of variable are stock prices?

Answer 36

Procyclical (rise in good economic times) and leading (usually fall in advance of a recession)

Question 37

What type of variable are interest rates?

Answer 37

Procyclical and lagging

Question 38

Does the real interest rate have an obvious cylcical patter?

Answer 38

No, it is acyclical most the time.

Question 39

Look at slides to see outlines of variables

Question 40

What are the 2 major components of business cycle theories?

Answer 40

A description of the shocks.
A model of how the economy responds to shocks

Question 41

What are the 2 major business cycle theories?

Answer 41

Classical theory
Keynesian theory

Question 42

Look at slides to see cyclical behavioiur indexes