BU - Business Cycle

Question 1

Business Cycle Phases

Answer 1

General phases: Expansion & Contraction
Peak
Trough

Question 2

Expansion

Answer 2

increasing gross domestic product (GDP) and decreasing unemployment rate

Question 3

Contraction

Answer 3

decreasing GDP and increasing unemployment

Question 4

Peak

Answer 4

very high GDP and peak employment (very low unemployment)

Question 5

Trough

Answer 5

very low GDP (very typically negative GDP) and by high and widespread unemployment

Question 6

Gross domestic product (GDP)

Answer 6

the market value of the goods and services produced by labor and property in the United States

Question 7

Recession

Answer 7

two consecutive quarters of negative GDP growth.

Question 8

Expansion Activities: Early

Answer 8

Activity rebounds
Credit begins to grow
Profits grow rapidly
Policy still simulative
Inventors low, sales improve

Question 9

Expansion Activity: Mid

Answer 9

Growth peaking
Credit growth strong
Profits growth peak
Policy neutral
Inventories, sales grow; equilibrium reached

Question 10

Expansion Activity: Late

Answer 10

Growth moderating
Credit tightens
Earnings under pressure
Policy contractionary
Inventories grow, sales growth falls
- Inflation high

Question 11

Contraction Activities

Answer 11

Falling activity
Credit dries up
Profits decline
Policy eases
Inventories, sales fall

Question 12

GDP is important because it

Answer 12

Indicates the pace of growth or decline of the economy relative to history
Determines which sectors are over or under-performing
Can compare the size and growth rate of economies throughout the world

Question 13

Real GDP Includes and Excludes:

Answer 13

includes:
-Market value of all final goods and services produced within an economy
-Income of foreigners working in the U.S.
-Profits that foreign companies earn in the U.S.
excludes:
-Imports
-Inflation
-Transactions were money changes hands but no new goods or services are produced
-Income of U.S. citizens working abroad
-Profits earned by U.S. companies in foreign countries

Question 14

GDP Formula

Answer 14

Y = C + I + G + (X – M) or C + I + G + NE
C is consumer spending
I is investment made by industry (fixed investment ad change in private inventory)
G is government spending
X-M is excess of exports over imports
you may see this listed as ‘NE’ for Net Exports
The GDP formula would be listed as C + I + G + NE

Question 15

1. Price elasticity
2. Elastic
3. Inelastic

Answer 15

1. measures the quantity demanded of a good in response to changes in that good’s price.
2. A good is elastic when its quantity demanded responds greatly to price changes.

Price goes up, demand downs down

3. A good is inelastic when its quantity demanded responds little to price changes (gasoline, consumer staples)

Price goes up, the demand doesn’t change

Question 16

Marginal utility

Answer 16

is the additional benefit (utility) received from the consumption of an additional unit of a good.

Ex: all you can eat buffet, at some point the more units is no longer beneficial

Question 17

Which law indicated that demand for an economic product will vary inversely with its price?

Answer 17

Law of demand

Question 18

Fiscal policy refers to…

Answer 18

the taxation, expenditures, and debt management by the federal government and how these interventions influence the economy.

Question 19

Fiscal Policy: Who controls the taxation and spending of the government in the United States?

Answer 19

Congress

• Taxation is the only means of revenue generation for the government.
  
  • Congress uses these revenues to finance the operations of the federal government.

Question 20

Fiscal Policy: How does changes in taxation affect corporations and individuals?

Answer 20

• Increases in tax rates reduce disposable income.
• Decreases in tax rates increase disposable income.

Question 21

Fiscal policy: How does changes in the government spending impact the economic growth?

Answer 21

• Increases in government spending are used to promote economic growth and/or recovery.
• Once the economy is functioning, the government will eliminate the support.

Question 22

Fiscal Policy: What is deficient spending & what activities occur?

Answer 22

It is when Government expenditures exceed the revenues generated .

• The government will sell Treasury Securities.
• These Treasury Securities compete with other issuers of debt securities driving values lower.

Question 23

Monetary Policy controls…and is controlled by…

Answer 23

the money supply, influences lending rates, may slow down or stimulate the economy.

• Controlled by the Federal Reserve Bank (the Fed)

Question 24

Monetary policy: Fed mandates:

Answer 24

• Maintain sustainable long-term growth as measured by gross domestic product (GDP)
• Maintain price levels that are supported by that economic growth as measured by inflation (CPI)
• Maintain full employment as measured by the long-term unemployment rate

Question 25

Monetary Policy: Fed tools (3)

Answer 25

* **Discount rate**: The rate at which member banks borrow from the government. * **Reserve requirement**: Percentage of deposits that must be held on reserve. * **Open market activities:** Fed buys and sells securities in the open market.

Question 26

Monetary Policy Action: Contraction “tight” What happens to: Discount Rate? Reserve Requirements? Open market activities?

Answer 26

* discount rate increases, which increases the cost of borrowing * Reserve requirements increases * Fed Sells securities to the market Slows pace of growth

Question 27

Monetary Policy Action: Expansionary “easy” What happens to: Discount Rate? Reserve Requirements? Open market activities?

Answer 27

* discount rate decreases, which lowers the cost of borrowing * reserve requirements decreases, increasing the amount available to be lent out * Fed buys securities from the market which puts money back into circulation increases pace of growth

Question 28

Supply & Demand: Substitutes

Answer 28

an increase in the price of one will cause an increase in the demand for the other (example would be price hikes in oil, gas or propane may lead to more firewood demand)

Question 29

Supply & Demand: Complements

Answer 29

products that are usually consumed jointly, when the price of one decreases, other other may increase (example would be PB on sale, and Jelly increase)

Question 30

Law of Demand

Answer 30

As prices increase, demand will decrease inverse reactions

Question 31

Law of Supply

Answer 31

As demand increases, so will supplies

Question 32

Supply-side inflation (cost-push) Demand-pull inflation

Answer 32

Supply-side: decrease in the aggregate supply of goods and services stemming from an increase in the cost of production Demand-pull: the increase in aggregate demand, categorized by households, business, government and foreign buyers. Can be caused by an expanding economy, increased gov't spending or overseas growth.

Question 33

Lagging indicators

Answer 33

**Lagging indicators tend to follow or lag economic performance** * Average duration of unemployment * Ratio of trade inventories to sales * Change in index of labor cost per unit of output * Average prime rate * Commercial and industrial loans outstanding * Ratio of consumer installment credit outstanding to personal income * Change in Consumer Price Index (CPI)

Question 34

Coincident indicator

Answer 34

**Coincident indicators tend to change at the same time as the economy:** * Employees on non-agricultural payrolls * Personal income less transfer payments * Industrial production * Manufacturing and trade sales

Question 35

Leading indicators

Answer 35

These tend to rise and fall in advance of the economy * Average weekly hours of production workers (manufacturing) * Initial claims for unemployment insurance * Manufacturers’ new orders * Percentage of companies reporting slower deliveries * New orders of non-defense capital goods * New private housing starts * Yield curve * S&P 500 * Money supply (M2) growth rate * Index of consumer expectation