Business cycles – Flashcards

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Long run trend of US
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Up sloping; yet interrupted by periods of economic instability
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Business cycles
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-Alternating rises and declines in the level of economic activity, sometimes over several years -Individual cycles vary substantially in duration and intensity -Are not regular more fluctuations than cycles
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Peak
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-Phase of business cycle -Business activity has reached a temporary maximum -Economy is near or at full employment and the level of real output is at or very close to the economy's full capacity -Price level is likely to increase
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Recession
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-Phase of business cycle -Decline in total output, income, and employment -Lasts six months or more -Widespread contraction of business activity in many sectors of the economy -Declines in real GDP, and significant decrease in unemployment
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Trough
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-Phase of business cycle -During recession or depression, output and unemployment bottom out at their lowest levels -Might be short-lived or quite long
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Expansion
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-Phase of business cycle -Is usually followed by a recession then recovery -Real GDP, income, and employment rise -At some time, the economy again reaches full employment -Inflation will occur if spending expands more rapidly than production capacity; prices of nearly all goods and services will rise
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Phases of business cycles
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-Business cycles all pass through same phases, they vary in length and intensity
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Fluctuations of business cycles (output and unemployment ) are driven by
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shock- unexpected events that individuals and firms may have trouble adjusting to- and sticky prices
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Irregular innovation
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-Source of shock that cause business cycles -Big inventions leads the economy to slow down or possibly decline -Innovations occur irregularly and unexpectedly
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Productivity changes
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-Source of shock that cause business cycles -When productivity unexpectedly increases the economy booms and vice versa
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Monetary factors
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-Source of shock that cause business cycles -More money than necessary= inflationary boom -Less money= an output decline, then price-level fall
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Political events
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-Source of shock that cause business cycles -Can create economic opportunities or strains
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Financial instability
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-Source of shock that cause business cycles -Unexpected financial bubbles or bursts can spill over to general public
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Who suffers during recession
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Industries that produce capital goods and consumer durables normally suffer greater output and employment declines than do service and nondurable consumer goods industries
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Problems that arise with business cycles
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Unemployment and inflation
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