Week 5 Lecture 2

Question 1

What is a recession?

Answer 1

• A recession is a period of declining real incomes and rising unemployment
• A recession occurs if there are two successive quarters of negative economic growth

Question 2

What is a depression?

Answer 2

A depression is a severe recession

Question 3

Explain what a peak, trough, contraction and expansion is in relation to GDP growth

Answer 3

• A peak is where economic activity reaches a high and real output begins to decline
• A trough is where economic activity reaches a low and the decline ends
• A contraction is when real output is lower than the previous time period
• An expansion is when real output is greater than the previous time period

Question 4

What does time series data record?

Answer 4

Time series data records observations of a variable over time

Question 5

What is a procyclical variable?

Answer 5

• A procyclical variable is a variable that is above trend when GDP is above trend
• Real wages is an example

Question 6

What is a countercyclical variable?

Answer 6

• A countercyclical variable is a variable that is below trend when GDP is above trend
• Unemployment is an example as it tends to fall as GDP grows

Question 7

Explain what a leading, lagging and coincident indicator is?

Answer 7

• A leading indicator can be used to foretell future changes in economic activity
• A lagging indicator changes after changes in economic activity have occurred
• A coincident indicator occurs at the same time as changes in economic activity

Question 8

What are some factors that cause short run variations in economic activity?

Answer 8

• Household spending decisions
• Firm’s decision making
• External sources
• Government policy
• Confidence and expectations
• Technological shocks

Question 9

Explain the differences between Keynesian, Marxists, Hayekians/von Misesians and Hard Monetarists business cycle models

Answer 9

• Keynesians: Business cycles reflect “imperfections” of Capitalism that we can and should try to fix
• Marxists: Business cycles reflect “imperfections” of Capitalism. The only real fix is to replace Capitalism with something else
  Hayekians/von Misesians: Business cycles are a natural feature of capitalism so there is nothing to fix
• Hard Monetarists: There is something to fix but governments invariable will get it wrong