Chapter 2 Flashcards
(24 cards)
What is a business cycle?
The cyclical pattern of expansion and contraction in economic activity within a country.
What are the key phases of a business cycle?
Expansion, Peak, Contraction (Recession), and Trough (Depression).
What does the trend line in a business cycle represent?
The overall long-term growth path of an economy.
What happens during the recession phase?
Economic growth slows down (negative GDP growth for 2 quarters).
Unemployment rises.
Consumer spending declines.
Business profits fall.
What is a depression?
An extended and severe recession with very low economic activity and high unemployment.
What happens during the recovery phase?
Economic activity increases.
More jobs are created.
Consumer spending rises.
Businesses increase production.
What is the prosperity phase?
High economic growth.
Increased consumer and business spending.
Peak in production and investment.
Inflation risk increases.
What are exogenous causes of business cycles?
Climatic changes (e.g., droughts affecting agriculture).
Technological changes (e.g., automation replacing jobs).
Unexpected events (e.g., pandemics, wars).
What are endogenous causes of business cycles?
Changes in consumer spending.
Investment fluctuations.
Shifts in production choices.
Government policies.
What are the different types of business cycles?
Kitchin cycles – Short-term (3-5 years), linked to inventory adjustments.
Juglar cycles – Medium-term (7-11 years), linked to investment in capital goods.
Kuznets cycles – Long-term (15-25 years), linked to infrastructure changes.
Kondratieff cycles – Very long-term (50+ years), linked to major technological changes.
What are the two main government approaches to managing business cycles?
Monetarism (Milton Friedman) – Uses monetary policy (money supply & interest rates).
Keynesianism (John Maynard Keynes) – Uses fiscal policy (taxation & government spending).
What is expansionary fiscal policy?
Used during recessions to boost economic activity.
Increase government spending.
Reduce taxes.
What is restrictive fiscal policy?
Used during booms to slow down inflation.
Decrease government spending.
Increase taxes.
How does the central bank control business cycles?
By influencing the money supply and interest rates.
What is expansionary monetary policy?
Used in a recession to stimulate demand.
Lower interest rates.
Increase money supply.
What is restrictive monetary policy?
Used in a boom to control inflation.
Increase interest rates.
Reduce money supply.
What is demand-side policy?
Aims to increase total demand in the economy.
Uses government spending & tax cuts to stimulate growth.
What is supply-side policy?
Aims to increase total supply in the economy.
Reduces production costs, improves efficiency, and promotes investment.
What are leading indicators?
Predict future economic activity (e.g., stock market trends, new business orders).
What are coincident indicators?
Show the current state of the economy (e.g., GDP, employment rates).
What are lagging indicators?
Confirm trends after they have occurred (e.g., unemployment rates, inflation rates).
What are open market operations?
Buying or selling government bonds to control the money supply.
What is moral suasion?
The central bank persuading banks to follow certain lending policies.
What are exchange rate policies?
Free-floating exchange rate – Currency value is determined by market forces.
Managed exchange rate – Government intervenes to stabilize currency.
