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2. CFA Economics > Understanding Business Cycles > Flashcards

Understanding Business Cycles Flashcards

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1
Q

What are the four phases of the business cycle?

A
  1. Expansion
  2. Peak
  3. Contraction
  4. Trough
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2
Q

What signifies expansion in a business cycle?

A
  • Real GDP is increasing.
  • Expansions feature increasing output, employment, consumption, investment, and inflation.
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3
Q

What signifies a peak in a business cycle?

A

Real GDP stops increasing and begins decreasing.

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4
Q

What signifies contraction in a business cycle?

A
  • Real GDP is decreasing.
  • Contractions are characterized by decreases in these indicators.
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5
Q

What signifies a trough in a business cycle?

A

Real GDP stops decreasing and begins increasing.

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6
Q

What typically happens to the inventory to sales ratios late in expansion?

A
  • Typically increase because sales slow
  • Firms decrease or increase production to restore their inventory-sales ratios to their desired levels.
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7
Q

What typically happens to the inventory to sales ratios late in contraction?

A
  • 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.
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8
Q

Describe how the cost of hiring/firing employees affects firms actions in the early stage of contractions and expansions:

A
  • 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.
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9
Q

What is the neoclassical opinion of business cycles?

A
  • 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.
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10
Q

What is the Keynesian theory on business cycles?

A
  • Excessive optimism/pessimism among business managers causes business cycles and
  • That contractions can persist because wages are slow to move downward.
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11
Q

What are New Keynesian’s theories on business cycles?

A
  • Excessive optimism/pessimism among business managers causes business cycles and
  • Input prices other than wages are also slow to move downward.
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12
Q

What is the Monetarist theory on business cycles?

A
  • 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.
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13
Q

What do austrian-school economists believe causes business cycles?

A

Business cycles are initiated by government intervention that drives interest rates to artificially low levels.

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14
Q

How does Real Business Cycle Theory explain business cycles?

A

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.

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15
Q

What is frictional unemployment?

A

Results from the time it takes for employers looking to fill jobs and employees seeking those jobs to find each other.

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16
Q

What is Structural Unemployment?

A

Results from long-term economic changes that require workers to learn new skills to fill available jobs.

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17
Q

What is Cyclical Unemployment

A

Positive when the economy is producing less than its potential real GDP. (and visa versa)

18
Q

A person is considered unemployed if they are:

A

Not working,

Available for work, and is

Actively seeking work.

19
Q

Who does the labor force include?

A

Includes all people who are either employed or unemployed.

20
Q

What is the unemployment rate?

A

The percentage of labor force participants who are unemployed.

21
Q

What is inflation?

A

Inflation is a persistent increase in the price level over time.

22
Q

What is an inflation rate?

A

An inflation rate is a percentage increase in the price level from one period to the next.

23
Q

What is disinflation?

A

Disinflation is a decrease in the inflation rate over time.

24
Q

What is deflation?

A

Deflation refers to a persistent decrease in the price level (i.e., a negative inflation rate).

25
Q

What does a price index measure?

A

Measures the cost of a specific basket of goods and services relative to its cost in a prior (base) period.

26
Q

How is the inflation rate most often calculated?

A

As the annual percentage change in a price index.

27
Q

What is CPI?

A
  • Consumer Price Index
  • Most often used price index
  • Based on the purchasing patterns of a typical household.
28
Q

What is headline inflation?

A

A percentage change in a price index for all goods.

29
Q

How is core inflation calculated?

A

Calculated by excluding food and energy prices from a price index because of their high short-term volatility.

30
Q

What in the Laspeyres price index based on?

A

The cost of a specific basket of goods and services that represents actual consumption in a base period.

31
Q

What causes the Laspeyres index to be biased upward?

A
  1. New goods,
  2. Quality improvements, and
  3. Consumers’ substitution of lower-priced goods for higher-priced goods over time.
32
Q

What is the Paasche price index based on?

A
  • Current consumption weights for the basket of goods and services for both periods and
  • Reduces substitution bias.
33
Q

What is a Fisher price index?

A

The geometric mean of a Laspeyres and a Paasche index.

34
Q

What is the cause of Cost-Push Inflation?

A

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.

35
Q

What causes Demand-Pull Inflation?

A

Results from persistent increases in aggregate demand that increase the price level and temporarily increase economic output above its potential or full-employment level.

36
Q

What does the non-accelerating inflation rate of unemployment (NAIRU) represent?

A

Represents the unemployment rate below which upward pressure on wages is likely to develop.

37
Q

What are leading indicators?

A

Leading indicators have turning points that tend to precede those of the business cycle.

38
Q

What are coincident indicators?

A

Coincident indicators have turning points that tend to coincide with those of the business cycle.

39
Q

What are lagging indicators?

A

Lagging indicators have turning points that tend to occur after those of the business cycle.

40
Q

What is a limitation of using economic indicators to predict business cycles?

A

Their relationships with the business cycle are inexact and can vary over time.

2. CFA Economics (9 decks)

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