I. Changes In Economic & Business Cycles

Front 1

What is Economics?

Back 1

• defined as the science that studies human behavior as the relationship between ends & scarce means that have alternative uses
• economics is about people & the choices they make

Front 2

What are Business Cycles?

Back 2

• refers to the rise & fall of economic activity relative to its long-term growth trend
• economic activity is characterized by fluctuations, & these fluctuations are known as the business cycles
• the analysis of business cycles is part of the field of macroeconomics

Front 3

What is Macroeconomics?

Back 3

• the study of the economy as a whole
• it examines the determinants of national income, unemployment, inflation, & how monetary & fiscal policies affect economic activity

Front 4

What is the most common measure of the economic activity or output of an economy?

Back 4

Gross Domestic Product (GDP)

Front 5

What is GDP?

Back 5

• the total market value of all final goods & services produced by resources within a country, regardless of who owns the resources
• the nation's output of goods & services

Front 6

What is Nominal GDP?

Back 6

• measures the value or all final goods & services in prices prevailing at the time of production
• measured in current prices
• not adjusted for inflation

Front 7

What is Real GDP?

Back 7

• measures the value of all final goods & services in constant prices
• adjusted to account for changes in the price level
• it removes the effects of inflation by using a price index
• the most commonly used measure of economic activity & national output

Front 8

What is the Price Index?

Back 8

• used to calculate Real GDP
• also called the GDP Deflator
• it is a price index for all goods & services included in DGL

Front 9

What is the Real GDP Formula?

Back 9

(Nominal GDP/GDP Deflator) x 100 = Real GDP

Front 10

What is the % Change in Real GDP Formula?

Back 10

(

Front 11

What is Real GDP Per Capita?

Back 11

• Real GDP Per Capita = Real GDP/Population
• used to compare standards of living across countries or across time
• used to measure economic growth

Front 12

What is Economic Growth?

Back 12

the increase in Real GDP per capita over time

Front 13

What are the 5 Fluctuations in of the Business Cycle?

Back 13

1) Expansionary Phase

2) Peak

3) Contractionary Phase

4) Trough

5) Recovery Phase

Front 14

What is the Expansionary Phase?

Back 14

• characterized by rising economic activity (Real GDP) & growth
• profits are rising as the demand for goods & services increase
• firms are likely to increase their workforce
• prices of good & services are likely to be rising
• GDP up, Profits up, Unemployment down, Prices up

Front 15

What is the Peak Phase?

Back 15

• a high point of economic activity
• it marks the end of an expansionary phase & the beginning of a contractionary phase in economic activity
• firms profits are likely to be at their highest level
• firms also face capacity constraints & input shortages, leading to higher overall price levels

Front 16

What is the Contractionary Phase?

Back 16

• characterized by falling economic activity & growth and follows a peak
• firms profits are likely to be falling from their highest levels
• GDP down, Profits down, Unemployment up

Front 17

What is the Trough Phase?

Back 17

• a low point of economic activity
• firms profits are likely to be at their lowest levels
• firms are likely to experience significant excess production capacity, leading them to reduce their workforce & cut costs

Front 18

What is the Recovery Phase?

Back 18

• follows a Through
• economic activity begins to increase & return to its long-term growth trend
• firms profits typically begin to stabilize as demand for goods & services begin to rise

Front 19

What is a Recession?

Back 19

• occurs when the economy experiences negative real economic growth
• two consecutive quarters of declining national output
• firms profits tend to fall, firms are likely to have excess capacity
• resources are likely to be underutilized & unemployment is likely to be high

Front 20

What is a Depression?

Back 20

• very severe recession
• characterized by a relatively long period of stagnation in business activity & high unemployment rate
• firms will experience significant excess capacity
• it it likely that many firms will go out of business during a depression

Front 21

What are Economic Indicators?

Back 21

• statistics that historically have been highly correlated with economic activity
• gathered by The Conference Board

Front 22

What are the 3 types of Economic Indicators?

Back 22

1) Leading Indicators

2) Lagging Indicators

3) Coincident Indicators

Front 23

What are Leading Indicators?

Back 23

• tend to predict economic activity
• they change before the economy starts to follow a certain trend

Front 24

What are the 10 Leading Indicators?

Back 24

1) Average new unemployment claims.

2) Building permits for residences.

3) Average length of workweek.

4) Money supply (M2)

5) Standard & Poor's 500 stock index.

6) Orders for goods.

7) Price changes of materials.

8) Index of consumer expectations.

9) Interest rate spread.

10) Index of supply deliveries.

Front 25

What are Lagging Indicators?

Back 25

• tend to follow economic activity
• they change after a given economic trend has already started
• economists measure lagging indicators to confirm or dispute previous forecasts & the effectiveness of policy directives

Front 26

What are the 7 Lagging Indicators?

Back 26

1) Prime rate charged by banks.

2) Average duration of unemployment.

3) Commercial & Industrial loans outstanding.

4) Consumer price index for services.

5) Consumer debt-to-income ratio.

6) Changes in labor cost per unit of manufacturing output.

7) Inventories-to-sales ratio.

Front 27

What are Coincident Indicators?

Back 27

• they change at approximately the same time as the whole economy
• they provide information about the current state of the economy
• may be used to identify, after the fact, the timing of peaks & troughs in a business cycle

Front 28

What are the 4 Coincident Indicators?

Back 28

1) Industrial production.

2) Manufacturing & trade sales.

3) Industrial production (GDP).

4) Personal income less transfer payments.

Front 29

What causes Business Cycles?

Back 29

shifts in aggregate demand and/or aggregate supply

Front 30

What are Aggregate Demand & Aggregate Supply Curves used for?

Back 30

• used to illustrate the relationship between a country's output (real GDP) & the price level (the GDP Deflator)
• also used to examine the causes of economic fluctuations

Front 31

What is the Aggregate Demand (AD) Curve?

Back 31

• illustrated the maximum quantity of all goods & services that households, firms, & the government are willing and able to purchase at any given price level
• it shows the relationship between total output (Real GDP) & the price level
• "total" demand in the economy as a whole
• x-axis = Real GDP; y-axis = the price level

Front 32

What is the Aggregate Supply (AS) Curve?

Back 32

• illustrates the maximum quantity of all goods & services producers are willing & able to produce at any given price level

Front 33

What is the Short Run Aggregate Supply (SRAS) Curve?

Back 33

upward sloping, illustrating that as the price level rises, firms are willing to produce more goods & services

Front 34

What is the Long Run Aggregate Supply (LRAS) Curve?

Back 34

• vertical, illustrating that in the long run, if all resources are fully utilized, output is determined solely by the factors of production
• corresponds to the potential level of output in the economy

Front 35

What is the Potential Level of Output (Potential GDP)?

Back 35

• refers to the level of Real GDP (national output) that the economy would produce if its resources (capital & labor) were fully employed
• when Real GDP is below Potential GDP, the economy will be experiencing a recession
• when Real GDP is above Potential GDP, the economy will be experiencing an expansion

Front 36

What does a Reduction in Demand mean?

Back 36

• if circumstances cause individuals, businesses, or governments to reduce their demand for goods & services, economic activity (Real GDP) will decline, leading to a contraction in economic activity & possible a recession
• GDP down, Profits down, Unemployment up, Prices down

Front 37

What does an Increase in Demand mean?

Back 37

• if circumstances cause individuals, businesses, & governments to increase their demand for goods & services, economic activity will rise, leading to a recovery or an expansion phase
• GDP up, Profits up, Unemployment down, Prices up

Front 38

What does a Reduction in Supply mean?

Back 38

• if circumstances cause firms to reduce their supply of goods & services, economic activity will fall, leading to a contraction or possible a recession
• GDP down, Profits down, Unemployment up, Prices up

Front 39

What does an Increase in Supply mean?

Back 39

• if circumstances cause firms to increase their supply of goods & services, economic activity will rise, leading to an expansionary phase
• GDP up, Profits up, Unemployment down, Prices down

Front 40

What are the 6 primary factor that shift Aggregate Demand?

Back 40

1) Changes in Wealth

2) Changes in Real Interest Rates

3) Changes in Expectations about the Future Economic Outlook

4) Changes in Exchange Rate

5) Changes in Government Spending

6) Changes in Consumer Taxes

Front 41

How do Changes in Wealth shift the Aggregate Demand?

Back 41

Increase in Wealth:

• causes the aggregate demand curve to shift to the right, causing the economy to expand & leads to an increase in national output (Real GDP)
• AD up, GDP up, Unemployment down, Prices up

Decrease in Wealth:

• causes the aggregate demand curve to shift to the left, causing a decline in national GDP, a contraction & possibly a recession
• AD up, GDP up, Unemployment down, Prices up

Front 42

How do Changes in Real Interest Rates shift the Aggregate Demand?

Back 42

Increase in Real Interest Rates:

• causes the aggregate demand curve to shift to the left, increases the cost of capital, therefore tends to reduce consumer demand for durable goods; save more & borrow less
• AD down, GDP down, Unemployment up, Prices down

Decrease in Real Interest Rates:

• causes the aggregate demand curve to shift to the right; reduces the cost of borrowing thereby increasing the demand for goods
• AD up, GDP up, Unemployment down, Prices up

Front 43

How do Changes in Expectations About the Future Economic Outlook (Consumer Confidence) shift the Aggregate Demand?

Back 43

Confident Economic Outlook:

• causes the aggregate demand curve to shift right; if households become confident about the economy, they are willing to spend more, causing national output to rise
• AD up, GDP up, Unemployment down, Prices up

Uncertain Economic Outlook:

• causes the aggregate demand curve to shift left; consumers tend to reduce current spending, causing national output to fall
• AD down, GDP down, Unemployment up, Prices down

Front 44

How do Changes in Exchange Rates shift the Aggregate Demand?

Back 44

Appreciated Currencies:

• causes the aggregate demand curve to shift to the left; a countries goods become relatively more expensive for foreigners, causing net exports to fall & national output to fall
• AD down, GDP down, Unemployment up, Prices down

Depreciated Currencies:

• causes the aggregate demand curve to shift to the right; a countries goods become less expensive for foreigners, causing net exports will rise & national output will rise
• AD up, GDP up, Unemployment down, Prices up

Front 45

How do Changes in Government Spending shift the Aggregate Demand?

Back 45

Increase in Government Spending:

• causes the aggregate demand curve to shift to the right, causing national output to rise
• AD up, GDP up, Unemployment down, Prices up

Decreases in Government Spending:

• causes the aggregate demand curve to shift to the left, causing national output to fall
• AD down, GDP down, Unemployment down, Prices down

Front 46

How do Changes in Consumer Taxes shift the Aggregate Demand?

Back 46

Increase in Consumer Taxes:

• causes the aggregate demand curve to shift to the left; reduces disposable income, causing national output to fall
• AD down, GDP down, Unemployment up, Prices down

Decrease in Consumer Taxes:

• causes the aggregate demand curve to shift to the right; increases disposable income, causing national output to rise
• AD up, GDP up, Unemployment down, Prices up

Front 47

What is an Expansionary Fiscal Policy?

Back 47

Increase in Government Spending and/or Decrease in Taxes

Front 48

What is a Contractionary Fiscal Policy?

Back 48

Decrease in Government Spending and/or Increase in Taxes

Front 49

What is the Multiplier Effect?

Back 49

• refers to the fact that an increase in consumer, firm, or government spending produces a multiplied increase in the level of economic activity
• results from the Marginal Propensity to Consume (MPC)

Front 50

What is the Marginal Propensity to Consume (MPC)?

Back 50

• the change in consumption due to a $1 increase in income
• because people tend to save part of their income, the MPC is typically less than 1

Front 51

What is the Multiplier Formula?

Back 51

1/(1-MPC) = Multiplier

Front 52

What is the Marginal Propensity to Save Formula?

Back 52

1-MPC

Front 53

What are the 2 factors that shift the Short-Run Aggregate Supply?

Back 53

1) Changes in Input (Resource) Prices

2) Supply Shocks

Front 54

How do Changes in Input (Resource) Prices shift the Short-Run Aggregate Supply?

Back 54

Increase in Input Prices:

• causes the short-run aggregate supply curve to shift left, causing the economy to contract & leads to a decrease in national output (real GDP)
• AS down, GDP down, Unemployment up, Prices up

Decrease in Input Prices:

• causes the short-run aggregate supply curve to shift right, causing the economy to expand & leads to an increase in national output
• AS up, GDP up, Unemployment down, Prices down

Front 55

How do Supply Shocks shift the Short-Run Aggregate Supply?

Back 55

Supplies are Plentiful:

• causes the short-run aggregate supply curve to shift to the right, causing national output to increase
• AS up, GDP up, Unemployment down, Prices down

Supplies are Curtailed:

• causes the short-run aggregate supply curve to shift to the left, causing national output to decrease
• AS down, GDP down, Unemployment up, Prices up