Module 13.1 - Business Cycle

Question 1

What are the four phases of the business cycle?

Answer 1

Expansion, Peak, Contraction (Recession), Trough

Question 2

What characterizes an expansion in the business cycle?

Answer 2

Real GDP is increasing, increasing employment, consumer spending, and business investment

Question 3

What happens at the peak of the business cycle?

Answer 3

Real GDP stops increasing and begins decreasing

Question 4

What is a contraction or recession?

Answer 4

Real GDP is decreasing

Question 5

What occurs at the trough of the business cycle?

Answer 5

Real GDP stops decreasing and begins increasing

Question 6

What is the classical cycle in terms of business cycles?

Answer 6

It is based on real GDP relative to a beginning value

Question 7

How does the growth cycle differ from the classical cycle?

Answer 7

It refers to changes in the percentage difference between real GDP and its longer-term trend or potential value

Question 8

What is the growth rate cycle?

Answer 8

It refers to changes in the annualized percentage growth rate from one period to the next

Question 9

What typically happens as an expansion approaches its peak?

Answer 9

Rates of increase in spending, investment, and employment slow but remain positive

Question 10

What is the common definition of an expansion?

Answer 10

Two consecutive quarters of growth in real GDP

Question 11

What is the common definition of a contraction?

Answer 11

Two consecutive quarters of declining real GDP

Question 12

What role do credit cycles play in the economy?

Answer 12

They refer to cyclical fluctuations in interest rates and the availability of loans

Question 13

How do credit conditions typically behave during economic expansions?

Answer 13

Lenders are more willing to lend and offer lower interest rates

Question 14

What happens to credit conditions during a contraction?

Answer 14

Lenders are less willing to lend and require higher interest rates

Question 15

What is the inventory-sales ratio?

Answer 15

It indicates the level of inventory firms are keeping relative to their sales

Question 16

What does an increase in the inventory-sales ratio indicate?

Answer 16

Sales growth begins to slow and unsold inventories accumulate

Question 17

What is one way firms react to fluctuations in business activity?

Answer 17

By adjusting their use of labor and physical capital

Question 18

What is the largest component of gross domestic product?

Answer 18

Consumer spending

Question 19

How does consumer spending behave during expansions?

Answer 19

It increases

Question 20

What type of goods is particularly sensitive to business cycle phases?

Answer 20

Durable goods

Question 21

What are important determinants of economic activity in the housing sector?

Answer 21

• Mortgage rates
• Housing costs relative to income
• Speculative activity
• Demographic factors

Question 22

What happens to housing activity when incomes are cyclically high?

Answer 22

Home buying and construction tend to increase

Question 23

What is the effect of increasing domestic GDP on imports?

Answer 23

It leads to increases in purchases of foreign goods

Question 24

How do currency exchange rates affect exports and imports?

Answer 24

An increase in currency value decreases exports and increases imports. ie. increase in countries currency makes goods more expensive from country.

Question 25

What is a leading indicator?

Answer 25

An economic indicator that changes direction before peaks or troughs in the business cycle

Question 26

What is a coincident indicator?

Answer 26

An economic indicator that changes direction at roughly the same time as peaks or troughs

Question 27

What is a lagging indicator?

Answer 27

An economic indicator that tends not to change direction until after expansions or contractions are underway

Question 28

What are typical characteristics of the Trough phase?

Answer 28

* GDP growth rate changes from negative to positive * High unemployment rate * Increasing use of overtime and temporary workers * Moderate or decreasing inflation rate

Question 29

What are typical characteristics of the Expansion phase?

Answer 29

* GDP growth rate increases * Unemployment rate decreases * Investment increases in producers' equipment and home construction * Inflation rate may increase * imports increase as domestic income increases

Question 30

What are typical characteristics of the Peak phase?

Answer 30

* GDP growth rate decreases * Unemployment rate decreases but hiring slows * Consumer spending and business investments grow at slower rates * Inflation rate increases

Question 31

What are typical characteristics of the Contraction/Recession phase?

Answer 31

* GDP growth rate is negative * Hours worked decrease * Unemployment rate increases * Consumer spending, home construction, and business investments decrease * Inflation rate decreases with a lag *imports decrease as domestic income growth slows.

Question 32

Consumer spending depends on level of _________ & _________.

Answer 32

Consumers current income & Expectations about future income.

Question 33

Do business cycles apply to all types of economies?

Answer 33

No, not agricultural or state planned economies.

Question 34

True or False: Credit cycles can amplify business cycles.

Answer 34

True. Deeper lows and higher highs when cycles of business match credit.

Question 35

What are the three factors determining levels of country import and exports?

Answer 35

1. Domestic gdp growth 2. GDP growth of trade partners 3. Currency exchange rates