Understanding Business Cycles Flashcards
What are the four phases of the business cycle?
- Expansion
- Peak
- Contraction
- Trough
What signifies expansion in a business cycle?
- Real GDP is increasing.
- Expansions feature increasing output, employment, consumption, investment, and inflation.
What signifies a peak in a business cycle?
Real GDP stops increasing and begins decreasing.
What signifies contraction in a business cycle?
- Real GDP is decreasing.
- Contractions are characterized by decreases in these indicators.
What signifies a trough in a business cycle?
Real GDP stops decreasing and begins increasing.
What typically happens to the inventory to sales ratios late in expansion?
- Typically increase because sales slow
- Firms decrease or increase production to restore their inventory-sales ratios to their desired levels.
What typically happens to the inventory to sales ratios late in contraction?
- Typically decrease near the end because sales begin to accelerate.
- Firms decrease or increase production to restore their inventory-sales ratios to their desired levels.
Describe how the cost of hiring/firing employees affects firms actions in the early stage of contractions and expansions:
- Due to high costs, firms prefer to adjust their utilization of current employees.
- As a result, firms are slow to lay off employees early in contractions and slow to add employees early in expansions.
What is the neoclassical opinion of business cycles?
- Business cycles are temporary and driven by changes in technology, and
- that rapid adjustments of wages and other input prices cause the economy to move to full-employment equilibrium.
What is the Keynesian theory on business cycles?
- Excessive optimism/pessimism among business managers causes business cycles and
- That contractions can persist because wages are slow to move downward.
What are New Keynesian’s theories on business cycles?
- Excessive optimism/pessimism among business managers causes business cycles and
- Input prices other than wages are also slow to move downward.
What is the Monetarist theory on business cycles?
- Inappropriate changes in the rate of money supply growth cause business cycles, and
- That money supply growth should be maintained at a moderate and predictable rate to support the growth of real GDP.
What do austrian-school economists believe causes business cycles?
Business cycles are initiated by government intervention that drives interest rates to artificially low levels.
How does Real Business Cycle Theory explain business cycles?
Explained by utility-maximizing actors responding to real economic forces such as external shocks and changes in technology, and that policymakers should not intervene in business cycles.
What is frictional unemployment?
Results from the time it takes for employers looking to fill jobs and employees seeking those jobs to find each other.
What is Structural Unemployment?
Results from long-term economic changes that require workers to learn new skills to fill available jobs.
What is Cyclical Unemployment
Positive when the economy is producing less than its potential real GDP. (and visa versa)
A person is considered unemployed if they are:
Not working,
Available for work, and is
Actively seeking work.
Who does the labor force include?
Includes all people who are either employed or unemployed.
What is the unemployment rate?
The percentage of labor force participants who are unemployed.
What is inflation?
Inflation is a persistent increase in the price level over time.
What is an inflation rate?
An inflation rate is a percentage increase in the price level from one period to the next.
What is disinflation?
Disinflation is a decrease in the inflation rate over time.
What is deflation?
Deflation refers to a persistent decrease in the price level (i.e., a negative inflation rate).
What does a price index measure?
Measures the cost of a specific basket of goods and services relative to its cost in a prior (base) period.
How is the inflation rate most often calculated?
As the annual percentage change in a price index.
What is CPI?
- Consumer Price Index
- Most often used price index
- Based on the purchasing patterns of a typical household.
What is headline inflation?
A percentage change in a price index for all goods.
How is core inflation calculated?
Calculated by excluding food and energy prices from a price index because of their high short-term volatility.
What in the Laspeyres price index based on?
The cost of a specific basket of goods and services that represents actual consumption in a base period.
What causes the Laspeyres index to be biased upward?
- New goods,
- Quality improvements, and
- Consumers’ substitution of lower-priced goods for higher-priced goods over time.
What is the Paasche price index based on?
- Current consumption weights for the basket of goods and services for both periods and
- Reduces substitution bias.
What is a Fisher price index?
The geometric mean of a Laspeyres and a Paasche index.
What is the cause of Cost-Push Inflation?
Results from a decrease in aggregate supply caused by an increase in the real price of an important factor of production, such as labor or energy.
What causes Demand-Pull Inflation?
Results from persistent increases in aggregate demand that increase the price level and temporarily increase economic output above its potential or full-employment level.
What does the non-accelerating inflation rate of unemployment (NAIRU) represent?
Represents the unemployment rate below which upward pressure on wages is likely to develop.
What are leading indicators?
Leading indicators have turning points that tend to precede those of the business cycle.
What are coincident indicators?
Coincident indicators have turning points that tend to coincide with those of the business cycle.
What are lagging indicators?
Lagging indicators have turning points that tend to occur after those of the business cycle.
What is a limitation of using economic indicators to predict business cycles?
Their relationships with the business cycle are inexact and can vary over time.
