Unit 13: Economic Fluctuations & Unemployment Flashcards
What is the business cycle?
Alternating periods of economic expansion and recession.
What happens during a recession?
Output declines or remains below potential, and unemployment typically rises.
What does Okun’s Law show?
The relationship between GDP growth and changes in unemployment.
What is nominal GDP?
GDP measured using current prices.
What is real GDP?
GDP adjusted for inflation using constant prices.
What are the three ways to measure GDP?
By production, expenditure, or income.
What are the components of GDP?
Consumption (C), Investment (I), Government Spending (G), Net Exports (X-M).
What is a shock?
An unexpected event that causes economic change.
What is an idiosyncratic shock?
A shock that affects an individual household.
What is an aggregate shock?
A shock that affects the entire economy.
What is self-insurance?
Saving or borrowing to manage personal economic fluctuations.
What is co-insurance?
Relying on social networks or public institutions for economic support.
What is consumption smoothing?
Households adjusting spending to maintain stable consumption over time.
When do households adjust long-term consumption?
When the shock is perceived as permanent.
What limits consumption smoothing?
Credit constraints and weakness of will.
Why is investment more volatile than GDP?
Because it depends heavily on firms’ expectations and business confidence.
What is a coordination game in investment?
A situation where firms are more likely to invest if others do too.
How does business confidence affect the economy?
It can trigger coordinated investment or disinvestment, amplifying cycles.
What role does government spending play in the business cycle?
It is less volatile and can stabilize the economy.
Why are exports volatile?
Because they depend on external demand and global economic conditions.
