Topic 6 Part 1 Flashcards
What is a business cycle?
The repeated sequence of economic expansion giving way to temporary decline followed by recovery
What are economists concerned with in terms of business cycles? (2)
(1) what causes business cycles and
(2) how policymakers should respond to them
Where did business cycle research start?
National Bureau of Economic Research (NBER)
Are business cycles recurrent or periodic?
Recurrent
What is the book that outlines perfectly how business cycles work?
Measuring Business Cycles by A. Burns and W. Mitchell (1946)
What are the 5 main points that Burns and Mitchell touch upon in their book?
✓Aggregate economic activity
✓Expansions and contractions
✓Comovement
✓The business cycle is recurrent, but not periodic
✓The business cycle is persistent
What did Burns and Mitchell say about aggregate economic activity? (2)
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.
What did Burns and Mitchell say about expansions and contractions?
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.
What is a severe depression called?
A depression
What does comovement mean?
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
What do Burns and Mitchell say about comovement?
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.
What do Burns and Mitchell mean when they say the business cycle is recurrent, but not periodic?
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.
What do Burns and Mitchell mean when they say the business cycle is persistent?
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
What does procyclical mean?
An economic variable that moves in the same direction as aggregate economic activity.
What does countercylical mean?
A variable that moves in the opposite direction to aggregate economic activity.
What does acyclical mean?
Variables that do not display a clear pattern over the business cycle.
What are the 3 timings of variables relative to aggregate economic activity called?
Leading
Coincident
Lagging
What is a leading variable?
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)
What are coincident variables?
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).
What is a lagging variable?
Variable tends to move after the aggregate economic activity (the peaks and troughs occur later than the corresponding business cycle peaks and troughs).
What type of variable is production?
A coincident and procyclical variable
What can be said about the cyclical sensitivity of production?
production in some sectors of the economy is greater that in others
What type of goods that are produced respond strongly to business cycles?
Industries that produce relatively durable or long-lasting goods (houses, refrigerators, capital
goods) respond strongly to the business cycle.
What type of variable is expenditure (Consumption and Investment)?
Coincident and procyclical
What type of variable is investment inventory?
Procyclical and leading, and very volatile
What type of variable is employment?
Coincident and procyclical variable
What type of variable is unemployment?
Strongly Countercyclical and timing is unclassified
What is mean by unemployments timing being unclassified?
It is leading in peaks and lagging in troughs
What was the pattern of employment and unemployment in the three most recent recessions?
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”.
What type of variable is average labour productivity?
Leading and procyclical variable
Why is average labour productivity procylical?
In a recession, workers produce less output during each hour of work than they do in booms
What type of variable is real wages?
Mildly procylical
What type of variable is nominal money growth?
Leading and procyclical variable
What type of variable is inflation?
procyclical but lagging
Are financial variables sensitive to the business cycle?
Yes, they are sensitive
What type of variable are stock prices?
Procyclical (rise in good economic times) and leading (usually fall in advance of a recession)
What type of variable are interest rates?
Procyclical and lagging
Does the real interest rate have an obvious cylcical patter?
No, it is acyclical most the time.
Look at slides to see outlines of variables
What are the 2 major components of business cycle theories?
A description of the shocks.
A model of how the economy responds to shocks
What are the 2 major business cycle theories?
Classical theory
Keynesian theory
Look at slides to see cyclical behavioiur indexes
