Week 4 - Business cycle and unemployment

Question 1

What are bonds?

Answer 1

They are debt instruments issued by government or corporations.
Also known as government securities.
A bond is promise to pay back a specific amount in the future.
Coupon bonds promise to repay the ‘face value’ and coupon (interest) at the end of the period.

Question 2

What is yield?

Answer 2

The yield (or interest rate) on a bond is inversely related to the price paid for the bond.
Bonds are traded freely in the financial markets and these prices alter with supply & demand.
High demand = increase price & decrease interest rate.
Low demand = decrease price and high rate of interest.

Question 3

Upward GDP movement = recovery or expansion. How does this occur within the business cycle?

Answer 3

1. Households & business begin to reduce their debt and increase their ability to spend.
2. Interest rates are low and C + I borrow more to finance new spending.
3. Firms start to expand and employ more people.
4. Households increase their income and increase their spending.
5. Recession comes to an end and a new period of expansion begins.

Question 4

Downward GDP movement = contraction or recession. How does this occur within the business cycle?

Answer 4

1. Often begins with a decline in business investment.
2. When spending declines, firms find their sales declining.
3. When sales decline firms cut back on production and begin to lay off staff or cut hours.
4. When unemployment increases, falling profit reduces income. This leads to a decline in spending and a recession may occur.

Question 5

What is meant by the term “trend growth”

Answer 5

It is what will establish the material standard of living of a country’s people in the long run.

Question 6

What is the business cycle?

Answer 6

GDP will fluctuate around the “trend growth” and this causes ups and downs in the economic cycle.

Question 7

When are we considered to be in a recession?

Answer 7

If there is at least 2 successive quarters of negative GDP growth.

Question 8

When are we considered to be in a depression?

Answer 8

When there is a severe and prolonged economic contraction.

Question 9

What are the economic variables and give examples?

Answer 9

1. Pro-cyclical - up in good times and down in back (profit).
2. Counter-cyclical - up in bad time and down in good (unemployment)
3. A-cyclical - not clearly in step with the cycle (wages)

Question 10

What were Galbraith’s 3 points that cause economic instablity?

Answer 10

Good times bring into existence:
1.   incompetent business executives
2.  wrongful government policy
3.  speculators
Working together they ensure the eventual bust.

Question 11

What are “hedge” investors

Answer 11

Cautious investors

Question 12

What are “speculative” investors?

Answer 12

Less cautious investors - trying to get rich quick.

Question 13

What are “ponzi” investors?

Answer 13

They need to borrow to repay debt. This is illegal.

Question 14

What is the definition of unemployed

Answer 14

A person not working more than 1 hour a week, is willing to start work, and be actively seeking work.

Question 15

What is considered the labour force?

Answer 15

Employed people and unemployed people.

Question 16

What is considered not in the labour force?

Answer 16

students, retiree’s and discouraged workers (people not actively looking for work).

Question 17

How is the unemployment rate calculated?

Answer 17

it is the percentage of the labour force that is unemployed.

Question 18

What other measures should be included within the unemployment rate?

Answer 18

underemployment / the participation rate / long-term unemployed and youth unemployment.