Understanding Business Cycles

Question 1

What are the four phases of the business cycle?

Answer 1

Expansion - growth of real GDP
Peak - stops increasing and begins going down.
Contraction - GDP decreasing
Trough - Stops decreasing and begins increasing.

Question 2

What are characteristics of the peak?

Answer 2

Rates of spending, investment and employment slows but inflation accelerates.

Question 3

What are characteristics of the expansion?

Answer 3

All sectors of the economy grow.

Question 4

What is the rule of thumb for business cycle identification.

Answer 4

Needs to happen for two consecutive quarters. They all happen but in different intervals. Different lengths of time.

Question 5

What happens to inventories though the business cycle?

Answer 5

Approaching peak sales growth slow, accumulate. Reduce of production, causes of contraction. Opposite for trough.

Question 6

What is the main points of the neoclassical model?

Answer 6

AD and AS changes are driven by technology. Business cycles are just temporary shifts away from long term equilibrium.

Question 7

what are the main points of the Keynesian model?

Answer 7

Shift is AD due to changes in the expectation were the cause of business cycles. Swings in optimism. Says that to influence AD gov should do so through fiscal and monetary policy.

Question 8

What are the main points of the monetarist model?

Answer 8

Variations in the rate of growth of the money supply are caused by poor decision making.

Question 9

What are the main points of the monetarist model?

Answer 9

Variations in the rate of growth of the money supply are caused by poor decision making. Instead should follow predictable money supply increases. Austrian model believes that government interference causes business cycles.

Question 10

What are the main points of the new classic school?

Answer 10

No policy adjustments. Based on utility theory. Effect of real economic variable such as change in tech.

Question 11

What are the main points of the new classic school?

Answer 11

No policy adjustments. Based on utility theory. Effect of real economic variable such as change in tech.

Question 12

What is structural unemployment?

Answer 12

Long run changes that case some jobs to be eliminated while producing others for people that are under qualified.

Question 13

What is Frictional Unemployment?

Answer 13

The unemployment from the lag time necessary to match employees who seek work with employers needing their skills.

Question 14

What is cyclical unemployment?

Answer 14

Caused by long run changes to the economy where some jobs are being eliminated and others created.

Question 15

What is the unemployment rate and labor force? What is being underemployed?

Answer 15

Unemployment rate the percentage of the labor force who do not have jobs. The labor force includes all people who are either employed or unemployed. People that voluntarily do not work are remove from the calculations.

Being underemployed is when you are working part time but rather be working full time.

Question 16

What is the participation ratio and discouraged workers?

Answer 16

Percentage of working age population who are either employed or looking. Discouraged workers are available but are neither employed nor actively seeking employment.

Question 17

What is inflation, hyper inflation, disinflation and deflation?

Answer 17

Inflation is persistent price increase over tie. Erodes purchasing power. Good for borrowers. When it accelerates out of control it is called hyperinflation. Disinflation is a decreasing inflation rate but above zero. Deflation is a persistent decrease in price. Associated with deep recessions.

Question 18

What is a Laspeyres index and what causes it to be bias upward?

Answer 18

Laspeyres index is a constant basket of goods.

Causes upward by new goods, initially more expensive. Quality - increases in quality could increase price - not because of inflation.
Substitution : If different prices of substitutes are around, people will buy the cheaper products making the basket a poor measure.

Question 19

You can eliminate bias in inflation calculation by using what measures?

Answer 19

Hedonic pricing can eliminate the bias from quality differences.

Fisher Index: is a geometric mean of a lapsers index and paasche index.

Question 20

Describe cost-push inflation.

Answer 20

From initial decrease in aggregate supply caused by a change in price of an input. Changes without change to demand initially, raising prices, and then demand changes and further drives prices. Usually caused by wages.

First lowers GDP.

Question 21

Describe Demand pull inflation.

Answer 21

Can result from money supply, increased, government spending or any change in AD.

AD changes, drives GDP above potential GDP. Unemployment falls below natural rate, drives up wages, decreases AS, back to equilibrium at full GDP and up to higher price.

First raises GDP.

Question 22

Describe Demand pull inflation.

Answer 22

Can result from money supply, increased, government spending or any change in AD.

AD changes, drives GDP above potential GDP. Unemployment falls below natural rate, drives up wages, decreases AS, back to equilibrium at full GDP and up to higher price.

First raises GDP.

Question 23

What are the three types of economic indicators?

Answer 23

Leading indicators change direction before peaks or troughs. Coincident indicators change direct at the same time. Lagging indicators happen after peaks or troughs.