business cycles

Question 1

long-run economic growth

Answer 1

rising productivity increases the average standard of living

Question 2

short-run growth

Answer 2

inherent business cycle (periods of economic expansion and recession)

Question 3

other measures of economic prosperity

Answer 3

health
increased lifespans
time spent on leisure

Question 4

real gdp growth

Answer 4

(new year - previous year / previous year) x 100

Question 5

estimating gdp over long periods

Answer 5

current real gdp = previous real gdp x (1+g)^t

Question 6

rule of 70

Answer 6

nb of years to double = 70 / growth rate

Question 7

labour productivity

Answer 7

nb of goods and services produced by one worker or by an hour of work

Question 8

factors affecting labour productivity

Answer 8

increase in capital/ hr
tech change
property rights

Question 9

potential gdp

Answer 9

level of real gdp attained when all firms are operating at capacity (normal hrs and normal-sized workforce)

Question 10

financial system

Answer 10

system of financial markets and financial intermediaries through which firms acquire funds from households

Question 11

financial markets

Answer 11

financial securities are bought and sold (stocks and bonds)

Question 12

financial intermediaries

Answer 12

firms that borrow funds from savers and lend them to borrowers

Question 13

key services of the financial system

Answer 13

risk sharing
liquidity (investment into cash)
information

Question 14

expression for investment in a closed economy

Answer 14

I = Y - C - G

Question 15

private saving

Answer 15

Sprivate = Y + TP - C - T

Question 16

public saving

Answer 16

Spublic = T - G - TP

Question 17

total saving

Answer 17

S = Y - C - G

Question 18

conclusion (investment and saving)

Answer 18

I = S

Question 19

the market for loanable funds

Answer 19

interaction of borrowers and lenders determining the market interest rate and nb of loanable funds exchanged

Question 20

effects of interest rates

Answer 20

increase: more saving
decrease: more borrowing

Question 21

effects of shifts

Answer 21

more savings or less borrowing = lower interest rates
less savings or more borrowing = higher interest rates

Question 22

shift: increase in gov’s budget deficit

Answer 22

shift the supply of loanable funds to the left
increased real interest rates / decreased investment

Question 23

shift: increase in desire of households to consume

Answer 23

shift supply curve to the left
increased real interest rates
decreased investment

Question 24

shift: increase in tax benefits

Answer 24

increase incentive to save
shift supply curve to the right
increased real interest rates
decreased investment

Question 25

shift: increase in expected future profits

Answer 25

shift demand curve to the right
decreased real interest rates and investment

Question 26

shift: increase in corporate tax

Answer 26

shift demand curve to the left
decreased real interest rates and investment

Question 27

crowding out

Answer 27

decline in private expenditures as a result of increases in government purchases

Question 28

recession

Answer 28

decline in activity spread across the economy for more than a few months
two consecutive quarters of declining gdp

Question 29

business cycle

Answer 29

1. end of expansion: interest rates rising, wages rising faster than other prices, firm’s profits falling
2. recession begins: decreased investment, households consume less, cut back employment, declines in spending
3. economic conditions improve: firms and firms invest again and employment recovers

Question 30

effect of the business cycle on inflation

Answer 30

rises towards the end of an expansion and fall over the course of each recession

Question 31

effect of business cycle on unemployment

Answer 31

rises during recession and recovers

Question 32

effect of business cycle on real gdp

Answer 32

annual fluctuations in real gdp was greater than before 1950

Question 33

great moderation and factors that causes it

Answer 33

business cycles have been particularly mild since the mid-1980s
- increasing importance of services
- the establishment of unemployment insurance
- active federal gov stabilization policies
- increased stability of financial system