Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook

2 What are the four phases of the business cycle? Peak Recession Trough Recovery

3 What causes unemployment? Excessive inventories

4 What causes inflation? MV/Q = P

5 What causes stagflation? A move to the left of the aggregate supply curve

6 Decrease in Aggregate Supply 0 Q2Q1 D S' P2 P1 S

7 What can cause a shift to the left of the aggregate supply curve? An increase in costs

8 What can cause an increase in costs?

9 Monetizing the debt > in the price of oil > in public union benefits Detailed laws Emphasis on green technology Unfunded liabilities Interest on national debt Taxes Tariffs Health care

10 What can cause deflation?

11 Quantitative easing low interest rates High corporate taxes Double taxation on money earned in foreign countries Interest earned on reserves held at the Fed Large fines paid to Treasury by big banks Interest on national debt Expectation of lower prices Lengthy and detailed laws

12 What was the Employment Act of 1946? Mandated the government to: 1)Balance the budget 2)Favorable balance of payments 3)Full employment 4)Coordinate monetary and fiscal policies

13 What is Keynesian Economics? If we can manage demand we can manage the economy

14 What did the 1970s teach us? A move to the left of the aggregate supply curve can only be solved by supply side remedies

15 What is the largest component of GDP? Consumption

16 What is investment? The purchase of new plants, equipment, buildings, and net additions to inventories

17 What is the acceleration principle? An increase in spending can lead to induced investments

18 Why is the investment sector so unstable? Expectations can change Inconsistent accelerator A change in the rate of growth determines swings Govt. policies can cause economic bubbles

19 What are pro-cyclical government polices? Policies that can accentuate the swings of the business cycle because of lag effects and emphasis of anti-growth policies

20 What is the Helmsman Dilemma? Brought on by the lag effects of discretionary fiscal policies

21 What is the Financial Stability Oversight Council? As part of the Financial Reform Bill of 2010 (Dodd- Frank Bill) the council decides which nonbank financial institutions might cause instability in the U.S. financial system

22 What is the significance of the FSOC? All banks with assets of more than $50 billion and any other financial businesses deemed large enough will be regulated by the Fed and protected with promise of bailouts if they get into financial trouble

23 What past examples of government protecting big business? Fannie Mae and Freddie Mac Bail out of banks in General Motors and Chrysler

24 What affect does the foreign sector have on the economy? Can be pro-cyclical or counter-cyclical

25 How do we compare real GDP as a percent from year to year? We take the percent increase from year to year and compare

26 What is the percent increase as we go from 3 to 5? 2 / 3 = 67%

27 What is the percent decrease as we go from 5 to 3? 2 / 5 = 40%

28 What is the circular flow of income and expenditures? A model that shows the income and expenditures in the economy

29 What are leakages? Any diversion of money from the domestic spending stream

30 What are examples of leakages?  Saving  taxes  imports

31 What are injections? Any payment of money into the economic stream

32 What are examples of injections?  Investment  government purchases  transfer payments  exports

33 At what point is equilibrium reached in the circular flow model? Where planned leakages equal planned injections

34 What are two examples of equilibrium in the circular flow of money?  Internal - banks  External – foreign exchange market

35 What happens when planned borrowing is greater than planned saving? Interest rates rise

36 What happens when planned saving is greater than planned borrowing? Interest rates fall

37 What happens when a country has a payments surplus? Its currency appreciates

38 What happens when a country has a payments deficit? Its currency depreciates

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