Economic and Business Cycles (B5:M1)

Question 1

what is the normal sequence of a business cycle? EP CTR

Answer 1

expansion, peak, contraction (recession), trough, recovery

Question 2

if a stimulus plan is going to increase government spending by 50 million and the marginal propensity to consume (MPC) is .75, how much is GDP likely to increase by?

Answer 2

200 million

change in real GDP = 1 / (1 - MPC) x change in spending

50 million / (1 - .75)

1 - MPC is also known as the marginal propensity to save (MPS)

Question 3

what can cause a recession?

Answer 3

a decrease in aggregate supply or a decrease in aggregate demand

Question 4

what does expansionary fiscal policy involve?

Answer 4

increase government spending, decrease taxes

this policy causes aggregate demand curve to shift to right, which increases real GDP

*contractionary fiscal policy is literally the opposite

Question 5

what are the factors that shift aggregate demand (AD)? TWICE G

Answer 5

taxes
wealth
interest rates
consumer confidence
exchange rates
government spending

Question 6

explain supply and demand graph

Answer 6

aggregate demand (AD) has a negative slope

short-run aggregate supply (SRAS) has a positive slope

long-run aggregate supply (LRAS) is vertical and it represents potential (equilibrium) output

price is on Y axis and output (real GDP) is on x axis

real GDP is where AD and SRAS intersect

Question 7

what are the factors that shift short-run aggregate supply?

Answer 7

changes in input (resource) prices
increase = left shift; real GDP decrease
decrease = right shift

supply shocks
plentiful supplies = right shift; real GDP increase
curtailed supplies = left shift

Question 8

what are the 3 types of economic indicators?

Answer 8

leading: predict economic activity
lagging: follow economic activity
coincidence: change with economic activity

Question 9

real GDP = ?

Answer 9

(nominal GDP / GDP deflator) x 100