LM 2: Understanding Business Cycles Flashcards
What is a business cycle?
refers to economic fluctuations between periods of expansion and contraction.
What are 3 types of cycles? CGG
- classical cycle
- growth cycle
- growth rate cycle
What are the 4 phases of a business cycle? RESC
- recovery
- expansion
- slowdown
- contraction
What is a classical cycle?
the fluctuations in the level of economic activity relative to GDP
What is growth cycle?
growth cycle refers to fluctuations in economic activity around the long-term potential or trend growth level.
What is growth rate cycle?
growth rate cycle refers to fluctuations in the growth rate of economic activity. the peaks and troughs tend to occur before growth cycle
During the recover phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.
inflation: moderate
employment: layoffs slow, but no new hiring
activity levels consumers & businesses: below potential but start to increase
description: economy going through trough
During the expansion phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.
inflation: picks up
employment: full time rehiring, unemployment falls
activity levels consumers & businesses: above average growth rates
description: economy enjoying upswing
During the slowdown phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.
inflation: accelerates
employment: hiring slows, unemployment falls
activity levels consumers & businesses: above average activity decelerating, move to below average growth rates
description: economy going through peak
During the contraction phase of a business cycle what happens to inflation, employment, activity levels of consumers & businesses, and a description.
inflation: decelerates with lag
employment: first cut hours then layoffs, unemployment increase
activity levels consumers & businesses: below potential, growth is lower than normal
description: economy weakens & may go into recession
What is credit cycle?
describes the phases or ease of access to credit by borrowers based on economic expansion and contraction
What are the 3 benefits of credit cycles to investors? UAA
- Understand developments in the housing and construction markets
- Assess the extent of business cycle expansions and contractions, particularly the severity of a recession if it coincides with the contraction phase of the credit cycle
- Anticipate policymakers’ actions
Why are companies reluctant to fire employees during temporary economic downturns?
because they may need them back
During the recover phase what happens to interest rates, and capital spending?
low interest rates support investment
capital spending low but increasing
During the expansion phase what happens to investments, earnings, and cash flows; and what is capital spending like?
increased investment spending supported by growth in earnings and cash flow
capital spending: focus on expansion, new types of equipment to meed demand
During the slowdown phase what happens to business conditions and capital spending?
peak business conditions with health cash flows
capital spending: new orders continue as companies operate at or near capacity
What are business conditions and capital spending in contraction phase?
fall in demand, profits, and cash flows
capital spending: existing orders cancelled, scale back, companies stop placing orders
What is the importance of consumer confidence?
reflects the expectations of future incomes and employment
What happens to imports and exports when currency appreciates and is more valuable than other countries?
imports increase when currency appreciates
exports decrease when currency appreciates
What is difference between durable and non-durable goods ?
Durable goods provide a stream of services or utility over time. In contrast, non-durable goods and services tend to be consumed immediately.
durable eg. car, washer
non-durable eg. food
What are economic indicators?
variables that provide information on the state over overall economy
What are the 3 types of economic indications, describe them? LCL
- leading: are useful for predicting the future state of the economy.
- coincident: help identify the current economic state.
- lagging: help identify past economic conditions.
What is a composite indicator?
Composite indicators include several different variables that tend to move together.
What are 2 reasons analyst study various economic indicators? IL
- identify the current business cycle phase
- likely trajectory of the economy
