Week 5 - Business Cycle Facts & RBC model Flashcards
What is the business cycle?
- Short-run fluctuations between economic downturns.
What is a recession and what happens during a recession?
- A recession is a period of economic downturn when output and employment fall
What are depressions?
- Extended periods of a recession
How has the frequency of recession changed over time?
- Recessions were much more common before the 1980’s and recently have become much less common
How are business cycle fluctuations measured?
- Yt Cyclical = Yt - Yt trend ( the difference between actual output and the trend output
What is procyclical, countercyclical and acyclical
- ProCyclical - Positively correlated with GDP
- CounterCyclical - Negativley correlated with GDP
- ACyclical - Not correlated with GDP
Is; Consumption, Investment, Capital, Hours worked, Productivity and wages ProCyclical, CounterCyclical OR Acyclical?
- Consumption - Procyclical and less volatile than GDP
- Investment - Procyclical, more volatile than output
- Capital - Acrylic, less volatile than output
- Total hours worked - Procyclical and as volatile as output
- Productivity - Pro Cyclical and less volatile than output
Describe the Real Business Cycle model
- No friction
- All markets are competitive
- Shocks to supply side
- Exogenous business shocks to technology
- No role for stabilisation policies
Describe the Keynsian/ New Keynsian model
Friction exists
Non completive markets
Demand shock are the ones which drive the business cycle
A role for policies especially monetary policy
- Friction exists
- Noncompetitive markets
- Demand shock are the ones that drive the business cycle
- A role for policies especially monetary policy
What does the RBC model assume for households?
- They live infinitely
- They decide how much to consume, work and save in order to maximize utility
- Dynamic Model
What does the RBC model assume for firms?
- Produce and sell one good only
- Demands K and L to maximise profit
- Production Technology, with TFP fluctuating over time
- Stochastic Model
What does the RBC model assume for markets?
- Perfectly competitive for final goods, capital and labor
- Supply = Demand, Simultaneously in all markets
- General Equilibrium Model
What is the production technology function equal to?
- Production function has constant returns to scale
State and Explain the Dynamic Budget Constraint
- Income - Consumption = Investment
- rtkt + wtht (Income as its the given amount of resources in each period) - Ct = Kt+1 -(1-depreciation rate)Kt ( This is the difference between capital available at t+1 and the undepreciated portion of Kt, essentially the new capital stock)
What is the household maximization problem?
