Economics Flashcards
What are the key features of Trough
GDP growth rate changes from negative to positive.
High unemployment rate, increasing use of overtime and temporary workers.
Spending on consumer durable goods and housing may increase.
Moderate or decreasing inflation rate.
What are the key features of expansion
GDP growth rate increases.
Unemployment rate decreases as hiring accelerates.
Investment increases in producers’ equipment and home construction.
Inflation rate may increase.
Imports increase as domestic income growth accelerates.
What are the key features of peak
GDP growth rate decreases.
Unemployment rate decreases but hiring slows.
Consumer spending and business investment grow at slower rates.
Inflation rate increases.
What are the key features of recession
GDP growth rate is negative.
Hours worked decrease, unemployment rate increases.
Consumer spending, home construction, and business investment decrease.
Inflation rate decreases with a lag.
Imports decrease as domestic income growth slows.
Neoclassical school
Neoclassical school economists believe shifts in both aggregate demand and aggregate supply are primarily driven by changes in technology over time. They also believe that the economy has a strong tendency toward full-employment equilibrium, as recession puts downward pressure on the money wage rate, or as over-full employment puts upward pressure on the money wage rate. They conclude that business cycles result from temporary deviations from long-run equilibrium.
Keynesian school
Keynesian economics is based on government intervention in the form of fiscal policy
Keynesian school economists believe these fluctuations are primarily due to swings in the level of optimism of those who run businesses. They overinvest and overproduce when they are too optimistic about future growth in potential GDP, and they underinvest and underproduce when they are too pessimistic or fearful about the future growth in potential GDP.
Keynesians argue that wages are “downward sticky,” reducing the ability of a decrease in money wages to increase short-run aggregate supply and move the economy from recession (or depression) back toward full employment. The policy prescription of Keynesian economists is to increase aggregate demand directly, through monetary policy (increasing the money supply) or through fiscal policy (increasing government spending, decreasing taxes, or both).
new Keynesian school
The New Keynesian school added the assertion that the prices of productive inputs other than labor are also “downward sticky,” presenting additional barriers to the restoration of full-employment equilibrium.
monetarist school
Monetarists believe the variations in aggregate demand that cause business cycles are due to variations in the rate of growth of the money supply, likely from inappropriate decisions by the monetary authorities. Monetarists believe that recessions can be caused by external shocks or by inappropriate decreases in the money supply. They suggest that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money suppl
austrian school
Economists of the Austrian school believe business cycles are caused by government intervention in the economy. When policymakers force interest rates down to artificially low levels, firms invest too much capital in long-term and speculative lines of production, compared to actual consumer demand. When these investments turn out poorly, firms must decrease output in those lines, which causes a contraction.
new classical school
New Classical school economists introduced real business cycle theory (RBC). RBC emphasizes the effect of real economic variables such as changes in technology and external shocks, as opposed to monetary variables, as the cause of business cycles. RBC applies utility theory, which we described in the readings on microeconomic analysis, to macroeconomics. Based on a model in which individuals and firms maximize expected utility, New Classical economists argue that policymakers should not try to counteract business cycles because expansions and contractions are efficient market responses to real external shocks
what are the different economic indicators and who publishes them
The Conference Board publishes indexes of leading, coincident, and lagging indicators for several countries. Their indexes for the United States include the following components:
Leading indicators: Average weekly hours in manufacturing; initial claims for unemployment insurance; manufacturers’ new orders for consumer goods; manufacturers’ new orders for non-defense capital goods ex-aircraft; Institute for Supply Management new orders index; building permits for new houses; S&P 500 equity price index; Leading Credit Index; 10-year Treasury to Fed funds interest rate spread; and consumer expectations.
Coincident indicators: Employees on nonfarm payrolls; real personal income; index of industrial production; manufacturing and trade sales.
Lagging indicators: Average duration of unemployment; inventory-sales ratio; change in unit labor costs; average prime lending rate; commercial and industrial loans; ratio of consumer installment debt to income; change in consumer price index
what is a laspreyes price index
basket of goods inflation, normal calculation
what is a paasche price index
basket of goods inflation, using the quantity of the most recent year for base year claculation
what is the fisher index?
it is the geometric mean of the laspreyes and paasche index
what is the fisher effect?
The Fisher effect states that the nominal interest rate is simply the sum of the real interest rate and expected inflation.
note some investors require a risk premium (RP) which is a third componentcan
