Periods of expansion and slowdown

When did economic shocks start?

When trade and banking started to emerge

Possible causes of business cycles

1. Household spending decisions 2. Firm Decision making 3. Life-cycle government 4. External Shocks 5. Confidence and expectations

Two successive quarters of negative growth

Why could markets not clear?

Prices are generally observed to be going downward

What does the invisible hand do?

It regulates the economy and returns output to its original level

How to correct equilibrium with demand side?

Use fiscal and monetary policy to stimulate the economy

The models that can be broken into 2 different groups

Models that assume that markets will clear quickly, welfare of households and firms is maximised and there no reason for economic factors to change behaviour

Models that assume markets won't clear quickly and that rigidities are present. This means for a period households and firms will not maximise welfare

1. In the long run, grave disturbances will occur in the economic system 2. If most people are not willing to see the difficulty, this is mainly because they assume that it will be they who will settle these questions for the others

1. We are stuck in a rut. We need an impulse, a jolt, an acceleration, let's experiment with boldness 2. Long run is a misleading guide to current affairs. In the long run we are all dead

The belief that an expansionary policy would result in additional increase in aggregate demand and increased income, thereby increasing consumer spending

How effective is the multiplier ?

Depends on the fraction of additional income that consumers are willing to spend and the rate of taxation.

What does MPC measure?

The marginal propensity to consume

Problems with the Multiplier

It's one of the misused concepts in all of economics Assumes constant prices and unused resources , meaning extra spending translates into extra output

Crowding Out Investment

Government gets involved in the market

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EC1203

Week 4

Term	Definition
Business Cycles	Periods of expansion and slowdown
When did economic shocks start?	When trade and banking started to emerge
Possible causes of business cycles	1. Household spending decisions 2. Firm Decision making 3. Life-cycle government 4. External Shocks 5. Confidence and expectations
Recession	Two successive quarters of negative growth
What sparked the Great Depression 1929?	The Wall Street Crash
Why could markets not clear?	Prices are generally observed to be going downward
What does the invisible hand do?	It regulates the economy and returns output to its original level
How to correct equilibrium with supply side?	The invisible hand
Classical/Austrian View	Markets will clear
The keynesian View	Markets Don't Clear
How to correct equilibrium with demand side?	Use fiscal and monetary policy to stimulate the economy
Which economist never worked in the private sector?	Hayek
The differing Views:	The models that can be broken into 2 different groups
Model 1	Models that assume that markets will clear quickly, welfare of households and firms is maximised and there no reason for economic factors to change behaviour
Model 2	Models that assume markets won't clear quickly and that rigidities are present. This means for a period households and firms will not maximise welfare
Hayek Quotes	1. In the long run, grave disturbances will occur in the economic system 2. If most people are not willing to see the difficulty, this is mainly because they assume that it will be they who will settle these questions for the others
Keynes Quotes	1. We are stuck in a rut. We need an impulse, a jolt, an acceleration, let's experiment with boldness 2. Long run is a misleading guide to current affairs. In the long run we are all dead
Multiplier	The belief that an expansionary policy would result in additional increase in aggregate demand and increased income, thereby increasing consumer spending
How effective is the multiplier ?	Depends on the fraction of additional income that consumers are willing to spend and the rate of taxation.
What does MPC measure?	The marginal propensity to consume
Problems with the Multiplier	It's one of the misused concepts in all of economics Assumes constant prices and unused resources , meaning extra spending translates into extra output
Crowding Out Investment	Government gets involved in the market

Created by: peadarbailey1206

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