Week 2 - The Business Cycle

Question 1

How is SAVINGS defined?

Answer 1

Savings = income less spending on current needs.

Question 2

What is the CURRENT ACCOUNT?

Answer 2

[not examinable]

Question 3

What is the BUSINESS CYCLE?

Answer 3

The BC plots REAL GDP against time.

An Expansion is where (REAL GDP) > long-term average.

A contraction is where (REAL GDP)

Question 4

What are the 3 types of UNEMPLOYMENT?

Answer 4

1. Frictional Unemployment
2. Structural Unemployment
3. Cyclical Unemployment

Question 5

What is FRICTIONAL UNEMPLOYMENT?

Answer 5

• People looking for a job that suits their skill set.

Considered a “good thing”

Question 6

What is STRUCTURAL UNEMPLOYMENT?

Answer 6

• People whose skills do not match the jobs in the market; technological changes supersede jobs etc. Inexperienced skillsets.

Question 7

What is CYCLICAL UNEMPLOYMENT?

Answer 7

Unemployment associated with the business cycle; insufficient demand for production/services creating job losses.

Question 8

What is the Frisch-Slutsky Paradigm?

Answer 8

Examines how an economic shock propagates through an economy.

Impulse -> Propagation Mechanism -> Business Cycle

Impulse: Stable economy is hit by a “shock”
Propagation: How the economy deals with the shock, either efficiently or inefficiently, the one-off shock is transmitted through time as business cycle fluctuations.

Question 9

What is Say’s Law?

Answer 9

Say’s law says: Active production generates sufficient income to turn around and purchase that production.

Question 10

What is meant by transmitted EFFICIENTLY or INEFFICIENTLY according to the Frisch-Slutsky paradigm?

Answer 10

EFFICIENTLY - price system adjustments (classical)

INEFFICIENTLY - Keynesian View