week 6 Flashcards
Business Cycles; Keynesian Economics and IS-LM; Begin Aggregate Demand and Aggregate Supply
what are business cycles?
periods of expansion and slowdown in level of economic activity
In a recession, what happens to real incomes + unemploymnet?
A period of declining real incomes and rising unemployment.
When does a recession occur?
2+ successive quarters of negative (real) economic growth.
Depression is a _______?
severe recession.
GDP growth shows patterns of ______ and ____,
Peaks + Troughs
Periods where growth is accelerating, decelerating and in some cases declining.
business cycle: what is a peak?
A peak is where economic activity reaches a high and real output begins to decline.
business cycle: what is a trough?
Trough is where economic activity reaches a low and the decline ends.
business cycle: what is a contraction?
Contraction is when real output is lower than the previous time period.
business cycle: what is an expansion?
Expansion is when real output is greater than the previous time period.
Time series data records observations of … ?
a variable over time
what does this figure show?
- The GDP of both the UK and the EU has risen since the 1960ies.
- GDP appears to fluctuate around a trend
- There are similarities in these fluctuations between the UK and the EU data
- Fluctuations are highly irregular
What are the 2 data concepts (variables) of the business cycle?
- Procyclical variable
- Countercyclical variable
What is a pro-cyclical variable?
A variable that is above trend when GDP is above trend.
e.g Real wages
What is a countercyclical variable?
Countercyclical variable A variable that is below trend when GDP is above trend.
e.g Unemployment since unemployment tends to fall as GDP grows.
How can we use variables as indicators? [3]
- A leading indicator
- A lagging indicator
- A coincident indicator
A leading indicator is used for what?
can be used to foretell future changes in economic activity.
A lagging indicator changes when?
changes after changes in economic activity have occurred.
A coincident indicator occurs at the same time as…?
occurs at the same time as changes in economic activity.
Example: cyclical indicators to try to predict potential turning points in economic activity
What is an example of a leading indicator?
OECDs composite of cyclical indicators
what causes short run variations in economic activity?
– Shocks to the economy thru changes in C and G.
– Last year (and also this year), external shocks e.g. due to geopolitical events are especially relevant
– Rigidities in markets.
– Other:
changes to productivity levels: monetary policy: the ability of workers to seek increases in real wages; government policy; irrationality…
6 potential causes of short run variation in economic activity
①Household spending decisions.
②Firms’ decision making.
③External sources.
④Government policy
⑤Confidence and expectations
⑥Technological shocks
There are a number of different business cycle models, e.g.
New Classical, New Keynesian, Real Business Cycles
Different models rely on different _________
rely on different underlying causes + different transmission mechanisms