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ES10002- Introductory Macroeconomics > Topic 5- Business Cycles and Macroeconomic Policy > Flashcards

Topic 5- Business Cycles and Macroeconomic Policy Flashcards

1
Q

What are the 2 main intellectual traditions?

A

Classical and Keynesian approaches

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2
Q

What point did Burns & Mitchell (1946) make about Business cycles and comovement?

A

That business cycles do not occur in just a few sectors or variables, they instead move together in a predictable way over the business cycle which is called comovement

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3
Q

What point did Burns & Mitchell (1946) make about Business cycles and aggregate economic activity?

A

Real GDP measures most closely aggregate economic activity however, it’s important to look at other indicators of activity such as employment and financial market variables

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4
Q

What point did Burns & Mitchell (1946) make about Business cycles and expansions & contractions?

A

Aggregate economic activity declines in a contraction until it reaches a trough and then increases in an expansion until it reaches a peak

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5
Q

What is a procyclical variable?

A

An economic variable that moves in the same direction as aggregate economic activity

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6
Q

What is a countercyclical variable?

A

A variable that moves in the opposite direction to aggregate economic activity

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7
Q

What is an acyclical variable?

A

A variable that does not display a clear pattern over the business cycle

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8
Q

What is a leading economic variable?

A

A variable that tends to move in advance of aggregate economic activity

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9
Q

What is a coincident economic variable?

A

A variable that tends to move at the same time with aggregate economic activity

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10
Q

What is a lagging variable?

A

A variable that tends to move after economic activity

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11
Q

What is the cyclical behaviour of production?

A

Coincident and procyclical

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12
Q

What is the cyclical behaviour of expenditure?

A

Coincident and procyclical

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13
Q

What is the cyclical behaviour of employment?

A

Coincident and procyclical

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14
Q

What is the cyclical behaviour of unemployment?

A

Strongly countercyclical

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15
Q

What is the cyclical behaviour of Average labour productivity?

A

Leading and procyclical

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16
Q

What is the cyclical behaviour of real wages?

A

Mildly procyclical

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17
Q

What is the cyclical behaviour of nominal money growth?

A

Leading and procyclical

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18
Q

What is the cyclical behaviour of Inflation?

A

Procyclical and lagging

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19
Q

What is the cyclical behaviour of Stock prices?

A

Procyclical and leading

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20
Q

What is the cyclical behaviour of nominal interest rates?

A

Procyclical and lagging

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21
Q

What are the 2 major components of business cycle theories?

A
  • A description of the shocks

- A model of how the economy responds

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22
Q

What is the full employment output level (ȳ)?

A

The level of output when the labour market is in equilibrium

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23
Q

What is the full employment output level determined by?

A

The FE level of employment and the current levels of capital and productivity

24
Q

Give 4 factors that shift the FE line right

A
  • A beneficial supply shock
  • An increase in labour demand
  • An increase in labour supply
  • An increase in the capital stock
25
Q

What is the formula for aggregate demand (Y_ad)?

A

Y_ad = C^d + I^d + G

26
Q

When is the goods market in equilibrium?

A

When aggregate demand is equal to aggregate supply

27
Q

What is the aggregate equilibrium condition?

A

Y - C^d - G = S^d = I^d

28
Q

How does the real interest rate affect real money demand?

A

Real money demand falls as the real interest rate rises

29
Q

How does output affect real money demand?

A

Real money demand rises as the level of output rises

30
Q

When is there equilibrium in the money market?

A

When the real money supply equal the real quantity of money demanded

31
Q

Give 4 main factors that shift the LM curve

A

Changes in:

  • Nominal money supply
  • Price level
  • Expected inflation
  • Nominal interest rate
32
Q

How does an increase in the nominal money supply (M) shift the LM curve?

A

Down and to the right because real money supply increases lowering the equilibrium interest rate

33
Q

How does an increase in the Price level (P) shift the LM curve?

A

Up and to the left because real money supply falls raising the equilibrium interest rate

34
Q

How does an increase in expected inflation (π^e) shift the LM curve?

A

Down and to the right because demand for money falls lowering the equilibrium interest rate

35
Q

How does an increase in the nominal interest rate on money (i_m) shift the LM curve?

A

Up and to the left because demand for money increases raising the equilibrium interest rate

36
Q

What does the IS curve show?

A

For any level of output (Y), the IS curve shows the real interest rate (r) for which the goods market is in equilibrium

37
Q

Why does the saving curve slope upward?

A

Because a higher real interest rate increases saving

38
Q

Why does the investment curve slope downward?

A

Because a higher real interest rate reduces the desired capital stock, thus reducing investment

39
Q

How is the IS curve derived?

A
  • Higher real interest rate causes people to increase saving thus reducing expenditure
  • Quantity demanded and supplied of goods falls
  • Consequently, output is reduced
40
Q

What generally shifts the LM curve?

A

Any change that decreases real money supply relative to real money demand shifts the LM curve up

41
Q

What generally shifts the IS curve?

A

Any change that reduces desired national saving relative to desired investment shifts the IS curve up and to the right

42
Q

What are 6 main factors that shift the IS curve and why

A 
Fall in saving:
-Increase in expected future output
-Increase in wealth
-Temporary increase in government purchases
-Decrease in taxes
Rise in investment:
-Increase in expected future MPK
-Decrease in the effective tax rate on capital
43
Q

What does the LM curve show?

A

At a given level of output (Y), the LM curve shows the real interest rate for which the money market is in equilibrium

44
Q

How is the LM curve derived?

A

Real money demand is plotted for different levels of output and the resulting equilibrium is observed

45
Q

When is there a general equilibrium?

A

When all markets are simultaneously in equilibrium which occurs where the FE, IS and LM curves intersect

46
Q

How does a temporary adverse supply shock affect general equilibrium?

A
  • Inflation rate rises temporarily as the price level rises
  • The equilibrium real wage and employment level decline
  • Output declines, while real interest rate rises
  • Since the real interest rate is higher and output is lower, expenditure must be lower at the new equilibrium
47
Q

How does a monetary expansion affect general equilibrium?

A
  • Suppose there’s an increase in the nominal money supply
  • Assuming P is constant, real money supply increases
  • This shifts the LM curve down and to the right
48
Q

How do classical economists see the IS-LM model?

A

They see rapid adjustment of the price level so the economy returns quickly to full employment after a shock

49
Q

How do Keynesian economists see the IS-LM model?

A

They see slow adjustment of the price level

50
Q

When is money neutral?

A

If a change in the money supply changes the prices level proportionately but has no effect on real variables

51
Q

What does the Aggregate demand curve show?

A

The relationship between the quantity of goods demanded and the price level when the goods market is in equilibrium

52
Q

What factors generally shift the AD curve?

A

Any factor that causes the intersection of the IS-LM curves to shift to the right causes the AD curve to shift to the right; the same goes for the left

53
Q

What does the aggregate supply curve show?

A

The relationship between the price level and the aggregate amount of output that firms supply

54
Q

What is the shape of the SRAS curve and why

A

In the short run, prices remain fixed so firms supply whatever output is demanded thus, the short-run aggregate supply curve is horizontal

55
Q

What is the shape of the LRAS curve and why

A

LRAS curve is vertical because full-employment output isn’t affected by the price level

56
Q

What factors generally shift the SRAS curve?

A

Whenever firms change their prices in the short run so any factor that changes the cost of production

57
Q

What factors generally shift the LRAS curve?

A

Anything that changes the full-employment output

ES10002- Introductory Macroeconomics (6 decks)

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