Chapter 8: Business Cycles Flashcards
What is meant by ‘procyclical’?
An economic variable that moves in the same direction as aggregate economic activity
(Up in expansions, down in contractions)
What is meant by ‘countercyclical’?
An economic variable that moves in the opposite direction to aggregate economic activity.
(Up in contractions down in expansions)
What do we call a variable that does not display a clear patter over the business cycle?
Acyclical
What is a leading variable?
An economic variable that tends to move in advance of aggregate economic activity.
What is a coincident variable?
An economic variable who’s peaks and troughs occur at about the same time as the corresponding business cycle peaks and troughs.
What is a lagging variable?
An economic variable whose peaks and troughs tend to occur later than the corresponding peaks and troughs in the business cycle.
Assumption about prices in the short and long run.
Classical vs. Keynesian
Classical economists argue that price adjustment happens quite rapidly to imbalances in quantities supplied and demanded so that the economy gets to its long-run equilibrium quickly — in a few months or less.
In contrast to the classical view, Keynesian economists argue that prices (and wages, which are the price of labor) do not necessarily adjust quickly in response to shocks. Hence the return of the economy to its long-run equilibrium may be slow, taking perhaps years rather than months.
What is the effect on prices (short-run) from an adverse aggregate supple shock?
An adverse aggregate supply shock shifts the LRAS curve to the right and lowers the full-employment level of output. Initially, prices are sticky and will remain at their pre-shock level. However, as the LRAS curve shifts to the right, nominal prices will move higher reflecting the lower level of attainable full-employment output.
