business cycle

Question 1

what is a business cycle?

Answer 1

short-term fluctuations in economy activity

Question 2

what is potential output?

Answer 2

the level of output that occurs when all resources are fully employed

Question 3

what is the output gap?

Answer 3

the difference between actual and potential output, measured as a percentage of potential output

Question 4

what is the formula for output gap?

Answer 4

( (actual output - potential output) / potential output ) * 100

Question 5

when does a negative output gap occur?

Answer 5

when actual output is below its potential: there are idle resources, and it typically corresponds with high unemployment

Question 6

when does a positive output gap occur?

Answer 6

when actual output is above potential output: the economy is using its resources with intensity

Question 7

what are the phases of the business cycle?

Answer 7

peak: a high point in economic activity
trough: a low point in economic activity
recession: a period of declining economic activity
expansion: a period of increasing economic activity

Question 8

explain the difference between levels vs. changes?

Answer 8

levels tell us where the economy is (look at level of GDP relative to potential output to see where economy is)

changes tell us where the economy is going (look at GDP growth rate to tell us if the economy is expanding or contracting)

Question 9

what are the characteristics of a recession?

Answer 9

short and sharp

Question 10

what are the characteristics of an expansion?

Answer 10

long and gradual

Question 11

how do you predict how the economy will perform?

Answer 11

business cycles are persistent

the economy is likely to perform the same this year as it did last year

Question 12

what is a leading indicator?

Answer 12

variables that tend to predict the future path of the economy

Question 13

what are lagging indicators?

Answer 13

variables that follow the business cycle with a delay

Question 14

what is Okun’s Rule of Thumb?

Answer 14

for every percentage point that actual output falls below potential output, the unemployment rate increases around half a percentage point

Question 15

what is seasonally adjusted data?

Answer 15

seasonally adjusted data are stripped of predictable seasonal patterns

Question 16

why is data seasonally adjusted?

Answer 16

removing the predictable influences allows us to spot changes in the underlying trends

Question 17

what are annualized rates?

Answer 17

annualized rates are data converted to the rate that would occur if the same growth rate had occurred throughout the year

Question 18

what is a revision?

Answer 18

update to earlier estimates

Question 19

what are the top 10 economic indicators?

Answer 19

1. real GDP
2. real GDI
3. nonfarm payrolls
4. unemployment rate
5. initial unemployment claims
6. business confidence
7. consumer confidence
8. inflation rate
9. employment cost index
10. stock market

Question 20

describe indicator: real GDP

Answer 20

• broadest measure of economic activity
• measures total production, total spending, and total income across the whole economy

Question 21

describe indicator: real GDI

Answer 21

• gross domestic income is calculated by adding up total income
• GDI often flashes warning signs for the economy sooner than GDP does

Question 22

describe indicator: nonfarm payrolls

Answer 22

• track how many jobs are created each month
• provide an early and reliable look at how quickly the economy is creating jobs

Question 23

describe indicator: unemployment rate

Answer 23

• snapshot of the strength of the labour market
• measure of excess capacity

Question 24

describe indicator: initial unemployment claims

Answer 24

• tells you how many people lost their jobs and applied for unemployment the previous week
• offer a timely insight into what is happening

Question 25

describe indicator: business confidence

Answer 25

• tells you what managers are planning
• when it starts to fall, a recession might be on the horizon

Question 26

describe indicator: consumer confidence

Answer 26

• tells you what consumers are thinking
• it rises when consumers are upbeat about the economy

Question 27

describe indicator: inflation rate

Answer 27

• tells you what’s happening with prices

Question 28

describe indicator: employment cost index

Answer 28

• tells you how fast wages and benefits are rising
• rising compensation is a sign of a healthy economy

Question 29

describe indicator: stock market

Answer 29

• tells you about the future expected profits of businesses