Unit 13: Economic Fluctuations & Unemployment

Question 1

Recession

Answer 1

Period where there are 2+ consecutive troughs in a business cycle/ Period where output is lower than usual

Question 2

Okun’s Law

Answer 2

Explains the negative relationship between GDP growth & unemployment

Question 3

Ways of measuring GDP

Answer 3

Spending, Income, Production

Question 4

GDP is defined to include imports & exports as:

Answer 4

1. the value added of domestic production/ expenditure on domestic production
2. income due to domestic production

Question 5

Consumption

Answer 5

Expenditure on goods and services. Can be short-lived or long-lives (consumer durables)

Question 6

Investment

Answer 6

Spending by firms on new capital, investment and building structures, including residential housing

Question 7

Government spending

Answer 7

Expenditure on consumption and investment done by the government/public individuals

Question 8

Exports

Answer 8

Domestically produced goods and services which are purchased by households/firms/governments in foreign countries

Question 9

Imports

Answer 9

Goods produced in a foreign country that are purchased by the domestic economy

Question 10

Percentage change in GDP

Answer 10

= sum of (% change in each component * share of each component in GDP)

Question 11

Self-insurance

Answer 11

Saving by a household (usually in times of very high income) to maintain consumption when there is a fall in income. “saving for a rainy day”

Question 12

Co-insurance

Answer 12

When households help each other maintain consumption in the event that a particular household encounters a shock. Involves altruism

Question 13

3 suggestions of consumption-smoothing model

Answer 13

1. decide if shock is temporary or permanent
2. if permanent: adjust long-run consumption accordingly
3. if temporary: nothing changes, as you were

Question 14

Credit-constraint

Answer 14

Restricts a household’s ability to borrow. Most common in low-income households

Question 15

Weakness of will

Answer 15

Characteristic of human behaviour that prevents people from following through on their plans

Question 16

Limited co-insurance

Answer 16

When households are unable to receive aid from other households. Usually due to isolation, lack of networks

Question 17

Vicious investment cycle

Answer 17

1. low expectations of future demand
2. low capacity utilization rate
3. little incentive to invest & hire
4. low spending by workers & firms

Question 18

Virtuous investment cycle

Answer 18

1. firms invest & hire
2. higher spending by workers & firms
3. higher demand for goods
4. high capacity utilization rate

Question 19

Inflation

Answer 19

Increase in the general price level of goods and services in the economy

Question 20

Deflation

Answer 20

Decrease in general price level of goods and services in the economy (cf disinflation)

Question 21

Disinflation

Answer 21

Decrease in inflation rates (cf deflation)

Question 22

CPI

Answer 22

Measure of general price level of goods and services paid by consumers - “price of basket of goods”

Question 23

GDP

Answer 23

Measure of price level of all DOMESTICALLY produced goods and services