Week 8: Business Cycles

Question 1

Define Business Cycles

Answer 1

fluctuation in the aggregate economic activity

Question 2

Characteristics of Business Cycles

Answer 2

• Aggregate activity
• Sequence of expansion and contraction
• Co-movement – pro-cyclical, acyclical or counter-cyclical
• Persistent
• Recurrent, but not periodic
  International

Question 3

Define Potential output

Answer 3

the level of output that occurs when all resources are fully employed. What we can sustainably produce given our current resources.

Question 4

Define Business cycle:

Answer 4

the short-term fluctuations in economic activity away from from potential output.

Question 5

Define Economic Recessions

Answer 5

periods of economic contractions - below potential output.

Question 6

Define Economic Booms

Answer 6

periods of economic expansions - above potential output

Question 7

What is the peak of an economic business cycle?

Answer 7

The point at which the economy turns from expansion to recession

Question 8

Define output gap

Answer 8

the difference between potential and actual output

Question 8

Define Economic Depressions

Answer 8

very deep and prolonged recessions

Question 9

What is the trough of an economic business cycle?

Answer 9

The point at which the economy turns from recession to expansion

Question 10

How is an economic ression defined as?

Answer 10

2 consecutive quarters of negative growth.

Question 11

What are the 2 shocks that cause recessions/booms?

Answer 11

1. Demand Shocks - sudden changes in AE
2. Supply Shocks - sudden changes in output due to production factors (labour/capital/land, intermediate goods/oil and electricity, supply chain disruptions)

Question 12

What are leading variables?

Answer 12

move in advance of aggregate activity
e.g. Business confidence; consumer confidence; the stock market.

Question 13

What are Coincident variables?

Answer 13

moves with aggregate activity.
e.g. GDP; exports; industrial production; retail sales; employment; inventories.

Question 14

What are Lagging variables? ‘

Answer 14

moves after aggregate activity.
e.g. Unemployment; labour costs; interest rates; CPI.

Question 15

What are
Countercyclical variables?

Answer 15

moves in the opposite direction as aggregate economic activity.
e.g. Unemployment; government spending; saving; corporate profits; inventories.

Question 16

What are procyclical variables

Answer 16

move in the same direction as aggregate economic activity
e.g. GDP; employment; interest rates; housing markets; retail sales; investment spending.

Question 17

What are
Acyclical variables?

Answer 17

A variable that does not move with aggregate activity in a predictable way.
e.g. Agricultural output; education rates; demographic trends (somewhat); immigration.

Question 18

What are monetary policicies?

Answer 18

Stabilizes the economy by changing the quantity of money and/or the overnight interest rate.

Question 19

What are
stabilization policies?

Answer 19

Policy efforts undertaken to reduce the severity of recessions

Question 20

What is a bond?

Answer 20

an IOU that promises to pay back the purchase price plus interest.

Question 20

What are fiscal policies?

Answer 20

Stabilizes the economy by changes in taxes, transfers, and/or government spending.

Question 21

4 Features of a bond

Answer 21

1. Issuer: the borrower
2. Principle: the amount to be repaid
3. Maturity date: due date for repayment
4. Coupons: interest paid along the way

Question 22

3 Types of Risk associated with bonds

Answer 22

1. Default risk: The risk of not getting paid at the time of maturity.
2. Term risk: The risk when there’s uncertainty about future interest rates.
3. Liquidity risk: The risk your bond will be hard to sell.

Question 23

What does the yield curve show?

Answer 23

the relationship between time to maturity of an assets and the interest rate on that asset

Question 24

Complete the sentence:
Risky assets usually have a _____ yield.

Answer 24

higher

Question 25

Low risk assets usually have a ____ yield.

Answer 25

low

Question 26

True or False: There is more uncertainty over longer periods of time and are riskier.

Answer 26

True