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BUSINESS CYCLE ECON
econ ch 10
| Question | Answer |
|---|---|
| What is the Business Cycle? | The pattern of rising real GDP followed by falling real GDP. |
| What are the phases of the Business Cycle? | Expansion (growth), Peak, Contraction (decline), Trough, Recovery. |
| What is a Recession? | A period of at least two consecutive quarters (6 months) of decline in GDP. |
| What is a Depression? | A period of at least two consecutive quarters of decline in GDP, with more than 10% official unemployment rate. |
| What is Business Cycle Forecasting? | The art of predicting business cycle turning points. |
| What are Business Cycle Indicators? | Economists use changes in a variety of activities, such as workweek length, unemployment claims, and new orders for goods, to predict the economy's direction. |
| What is the significance of the Average Workweek of Production Workers in Manufacturing? | An increase in the average workweek suggests companies are producing more because they are selling more, indicating economic growth. |
| What does a decrease in Weekly Unemployment Claims suggest? | A decrease in claims means companies are hiring, suggesting economic growth |
| Why are New Orders for Consumer Goods important for forecasting? | An increase in new orders indicates that consumers are buying more, which is often linked to higher wages or more jobs, signaling economic improvement. |
| What is an Expansion phase in the business cycle? | The period of economic growth where real GDP rises, leading to increased production, employment, and consumer spending. |
| What is the Peak of the business cycle? | : The point at which the economy is at its highest output before growth slows down and a contraction begins. |
| What is a Contraction in the business cycle? | A period where the economy declines, characterized by falling GDP, reduced production, and rising unemployment. |
| What is a Trough in the business cycle? | The lowest point in the business cycle where economic activity stops declining and begins to recover. |
| What does Recovery mean in the business cycle? | The phase where the economy begins to improve after a trough, leading to increased output, employment, and consumer spending. |
| How does Average Initial Weekly Claims for Unemployment Benefits act as an economic indicator? | A decrease in claims signals that fewer people are losing jobs, suggesting economic recovery or growth. |
| What does an Increase in the Average Workweek of Manufacturing Workers indicate? | It suggests that companies are demanding more labor due to higher production needs, often due to higher consumer demand or a growing economy. |
| What does a rise in New Orders for Consumer Goods signify? | A rise suggests that consumer demand is increasing, which may reflect growing consumer confidence or improving economic conditions. |
| What is the difference between a Recession and a Depression? | A recession is a period of declining GDP for at least two quarters, whereas a depression is a prolonged recession with more severe effects, including a significant rise in unemployment (over 10%). |
| Why is Forecasting the business cycle considered an art rather than a science? | It involves predicting turning points in the economy, which can be difficult due to the complexity of economic factors and their unpredictable nature. |
| What is the role of Government Policy in the business cycle? | Governments may use fiscal policy (taxes, spending) or monetary policy (interest rates, money supply) to try to stabilize or stimulate the economy during different phases of the business cycle. |
| How does an Increase in Unemployment Claims affect the business cycle? | An increase in claims signals that businesses are laying off workers, which can indicate a downturn or contraction in the economy. |
| What is the relationship between GDP and the business cycle? | GDP is a key measure of economic activity; the business cycle is driven by fluctuations in GDP, with expansions marked by rising GDP and contractions marked by falling GDP. |
| What does the Consumer Confidence Index measure, and why is it important? | It measures consumer optimism about the economy. High confidence often leads to higher consumer spending, which can drive economic expansion. |
| What is a Leading Economic Indicator? | : A statistical series that tends to change before the economy as a whole changes. Leading indicators (like stock prices, building permits, or new orders) help forecast future economic activity. |
| What is a Lagging Economic Indicator? | A statistic that follows changes in the economy, such as the unemployment rate or inflation rate, helping to confirm or validate the trends in the business cycle. |
| : What are Coincident Indicators? | Economic indicators that change at the same time as the overall economy, such as GDP, industrial production, and personal income. They reflect the current state of the economy. |
| How does Inflation affect the business cycle? | High inflation can lead to decreased purchasing power and economic slowdown, while low or stable inflation often correlates with steady economic growth. |
| What happens during an Economic Boom? | The economy grows rapidly, unemployment drops, and inflation may increase as demand for goods and services outpaces supply. |
| What is the role of the Central Bank (Federal Reserve in the U.S.) during the business cycle? | The central bank adjusts interest rates and regulates money supply to manage inflation, control unemployment, and stabilize the economy. |
| What is a V-shaped Recovery? | A quick economic rebound after a sharp decline, where GDP and employment return to pre-crisis levels in a relatively short period of time. |
| What is the official definition of unemployment? | Adults who are willing and able to work, are not working, and have made a specific effort to find work. |
| How is an adult defined in unemployment statistics? | Anyone aged 16 or older |
| What qualifies as "actively seeking work"? | Having a job lined up within 30 days. Waiting to be recalled to a previous job. Having searched for work in the past 4 weeks. |
| How is the unemployment rate calculated? A: | Unemployment Rate= Total Civilian Labor Force divided Number Unemployed times 100 |
| Who is included in the Institutionalized Population? | Those under 16 years old. People in jails or prisons. Residents of mental hospitals and nursing homes. |
| What defines the Non-Institutionalized Population? | Everyone over 16 years old. Not in institutions like prisons or nursing homes. |
| Who is considered Not in the Labor Force? | Retirees not working. People unable to work (e.g., disabled individuals). Full-time students. Homemakers. |
| What category does the Armed Forces fall into? | Active-duty military personnel are included in the Armed Forces category and excluded from the civilian labor force. |
| Why does the official unemployment rate undercount true unemployment? | Discouraged workers: Not counted as unemployed. Part-time workers: Counted as employed, even if involuntary. Women: Many want to work but face caregiving barriers. Prison labor: Competes with free labor but is not counted. |
| What are discouraged workers, and why are they a problem? | People without jobs who gave up searching for work. They are dropped from the labor force and not included in unemployment statistics. |
| How do part-time workers affect unemployment statistics? | Those working part-time involuntarily (e.g., due to economic conditions) are still counted as employed, skewing the rate. |
| What challenges do women face in being counted? | Many want to work but cannot due to high caregiving costs (childcare, eldercare). |
| How does prison labor affect the unemployment rate? | Over 2 million prisoners are working (e.g., making furniture, taking catalog orders), competing with free labor but not counted in the statistics. |
| What is frictional unemployment? | Voluntary unemployment as individuals transition between jobs, enter the workforce for the first time, or re-enter after a break. |
| What is seasonal unemployment? | Temporary unemployment due to the seasonal nature of certain jobs (e.g., construction, agriculture, teaching) at any time of the year. |
| What is cyclical unemployment? | Unemployment tied to the business cycle. Recession: High unemployment. Economic growth: Low unemployment. Increasingly affects white-collar jobs and is not voluntary. |
| What is structural unemployment? | Long-term unemployment caused by technological advances or changes in the economy. Affects workers in industries like coal mining, farming, and bank telling. Considered the most serious and not voluntary |
| : What are the individual and family impacts of unemployment? | Loss of income and benefits. Emotional stress: depression, anxiety, and loss of self-esteem. |
| What are the social impacts of unemployment? | Increased suicides and violence (child, spouse, and elder abuse). Rise in drug and alcohol abuse. Higher crime rates and welfare dependency |
| What is the GDP Gap, and how is it calculated? | GDP Gap = Potential GDP - Actual GDP Potential GDP: GDP at full employment. Actual GDP: Current size of the economy. |
| How does the GDP Gap measure economic impact? | Indicates the dollar value of goods and services not produced due to unemployment. The gap widens with severe or prolonged recessions. |
| What is the labor market participation rate? | The percentage of the population aged 16+ (not institutionalized or in the military) who are working. |
| Why is the participation rate important? | It captures discouraged workers, offering a broader measure of labor market health. |
| What was the labor market participation rate in June 2020, and why was it significant? | 55%, the lowest since the Great Depression, highlighting the pandemic's impact on employment. |
| What is the definition of inflation? | A rise in the general price level. |
| How is inflation often measured? | By the Consumer Price Index (CPI) |
| What is the formula for the percentage increase in CPI? | Percent Increase in CPI= CPI in current year minus CPI in previous year divided CPI in previous year times 100 |
| What causes demand-pull inflation? | Excess demand pulls up prices, often due to increases in government spending (e.g., during wars). |
| Does an increase in government spending always create inflation? | No, it doesn’t automatically create inflation. |
| What causes cost-push inflation? | Rising costs drive up prices. |
| What are the three types of cost-push inflation? | Wage-price spiral Profit-push inflation Supply-side shocks |
| What is the wage-price spiral? | Rising wages lead companies to increase prices, which leads to demands for higher wages, continuing the cycle. |
| What causes the wage-price spiral? | Labor unions. Worker shortages. |
| Is the wage-price spiral still a problem today? | No, it hasn’t been a significant issue since the early 1980s. |
| What is profit-push inflation? | Companies in industries with few competitors raise prices to protect profit margins. |
| What are supply-side shocks? | Sudden and unexpected increases in the prices of essential materials, like oil or energy. |
| Why are people on fixed incomes hurt by inflation? | If their nominal income does not increase at the same rate as inflation, their real income falls. |
| Why are lenders hurt by inflation? | If inflation is higher than the nominal interest rate, lenders lose money. Lenders rely on accurate predictions of inflation to ensure profits. |
| How do lenders calculate real interest rates? | Real Interest Rate= Nominal Interest Rate−Rate of Inflation |
| What happens if inflation is less than the nominal interest rate? | Lenders earn a profit. |
| What happens if inflation is greater than the nominal interest rate? | Lenders suffer a loss. |
| Why do lenders prefer low inflation? | It helps them maintain profits and avoid losses, regardless of the broader impact on the economy. |
| What is nominal income? | The face value of income, not adjusted for inflation. |
| What is real income? | Nominal income adjusted for inflation using price indexes. |
| How do you calculate the percentage change in real income? | % Change in Real Income= % Change in Nominal Income minus % Change in Price Level |
| What happens if nominal income increases slower than the rate of inflation? | Real income falls at the same rate inflation rises. |
| How do lenders account for inflation in loans? | They estimate an expected rate of inflation based on the current rate and future projections. |
| What determines whether lenders profit or lose money? | Profit: Inflation is less than the nominal interest rate. Loss: Inflation is greater than the nominal interest rate. |
| Why is accurate inflation prediction critical for lenders? | It allows them to set interest rates high enough to cover costs and earn a profit. |
Created by:
bellam08
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