Week 8: Business Cycles Flashcards
Define Business Cycles
fluctuation in the aggregate economic activity
Characteristics of Business Cycles
- Aggregate activity
- Sequence of expansion and contraction
- Co-movement – pro-cyclical, acyclical or counter-cyclical
- Persistent
- Recurrent, but not periodic
International
Define Potential output
the level of output that occurs when all resources are fully employed. What we can sustainably produce given our current resources.
Define Business cycle:
the short-term fluctuations in economic activity away from from potential output.
Define Economic Recessions
periods of economic contractions - below potential output.
Define Economic Booms
periods of economic expansions - above potential output
What is the peak of an economic business cycle?
The point at which the economy turns from expansion to recession
Define output gap
the difference between potential and actual output
Define Economic Depressions
very deep and prolonged recessions
What is the trough of an economic business cycle?
The point at which the economy turns from recession to expansion
How is an economic ression defined as?
2 consecutive quarters of negative growth.
What are the 2 shocks that cause recessions/booms?
- Demand Shocks - sudden changes in AE
- Supply Shocks - sudden changes in output due to production factors (labour/capital/land, intermediate goods/oil and electricity, supply chain disruptions)
What are leading variables?
move in advance of aggregate activity
e.g. Business confidence; consumer confidence; the stock market.
What are Coincident variables?
moves with aggregate activity.
e.g. GDP; exports; industrial production; retail sales; employment; inventories.
What are Lagging variables? ‘
moves after aggregate activity.
e.g. Unemployment; labour costs; interest rates; CPI.
What are
Countercyclical variables?
moves in the opposite direction as aggregate economic activity.
e.g. Unemployment; government spending; saving; corporate profits; inventories.
What are procyclical variables
move in the same direction as aggregate economic activity
e.g. GDP; employment; interest rates; housing markets; retail sales; investment spending.
What are
Acyclical variables?
A variable that does not move with aggregate activity in a predictable way.
e.g. Agricultural output; education rates; demographic trends (somewhat); immigration.
What are monetary policicies?
Stabilizes the economy by changing the quantity of money and/or the overnight interest rate.
What are
stabilization policies?
Policy efforts undertaken to reduce the severity of recessions
What is a bond?
an IOU that promises to pay back the purchase price plus interest.
What are fiscal policies?
Stabilizes the economy by changes in taxes, transfers, and/or government spending.
4 Features of a bond
- Issuer: the borrower
- Principle: the amount to be repaid
- Maturity date: due date for repayment
- Coupons: interest paid along the way
3 Types of Risk associated with bonds
- Default risk: The risk of not getting paid at the time of maturity.
- Term risk: The risk when there’s uncertainty about future interest rates.
- Liquidity risk: The risk your bond will be hard to sell.
What does the yield curve show?
the relationship between time to maturity of an assets and the interest rate on that asset
Complete the sentence:
Risky assets usually have a _____ yield.
higher
Low risk assets usually have a ____ yield.
low
True or False: There is more uncertainty over longer periods of time and are riskier.
True
