Business Cycle AWE FUCK YEA Definition Alternating period of economic growth and contraction which can be measured by changes in RGDP o 4 phases Expansion Peak Recession Trough Causes o Shocks in AD Change in wealth Pessimism optimism about future Change in govt policy o Shocks to AS Change in factors of production other than capital labor Sudden change in oil prices Inventions earthquake drought o Changes in total expenditures GDP and AD C I G NX NBER determines if we are in a recession Challenges No two business cycles are alike Real GDP comes out only quarterly o Must anticipate recession o Businesses need to anticipate change in demand Indicators for their output Released more frequently than RGDP Lead lag and coincident Business cycle indicators o Leading o Coincident Stock prices Average weekly hours worked Labor productivity Consumer confidence New orders for plant and equipment and consumer goods Employment Unemployment Consumption Business investments factories warehouses equipment Personal income Industrial production o Lagging Inflation Three ingredient recipe for recession Wessel Decrease in home prices An increase in oil prices Credit Crunch Banks decrease lending Shifts in C vs movement along C Change in oil prices is movement Change in home prices is shift b c a decrease in wealth What factors determine I Expectations of future profitability Real interest rate o Rate of profit expected real return on I Interest cost o If expected return is 3 on new project and cost to borrow is 4 project isn t profitable Business taxes o When t falls I rises Cash flow Shift in I occurs when any factors except for real interest rate change Shift in I creates a shift in AD because AD C I G NX Net Exports Increases during recession and decreases during expansion o Relative price levels o Relative output growth o Relative US dollar strength If inflation of US ROW NX fall During recession inflation of US ROW so US goods are cheaper so exports increase and imports decrease so NX increase As US dollar strengthens US imports increase exports decrease o 100Y 1 100Y 80 cents less US to buy same amount of Yen If the growth rate of US GDP is faster than the ROW GDP the dollar strengthens so NX decreases Aggregate demand Shift in AD o When there s a change in any part of C I G NX except change in PL o Change in income taxes Consumption factors o Wealth o Interest rate o Expected future income Investment factors o Expected future profitability o Interest rate o Business taxes o Cashflow Government and Net Exports o Change in relative RGDP to ROW o Relative strength of Why does AD have a negative slope o Wealth effect Wealth Assets Liabilities As PL rises wealth falls o Interest rate effect As PL rises we need more money to buy goods and services Save more and spend less Decreases C and I The increase in demand for loans increases the real interest As PL rises faster in US compared to ROW X dec M inc NX dec rate on loans o NX effect Questions I missed Fiscal policy to prevent or combat recession would be to reduce taxes Classical economists believed a prolonged unemployment is impossible because the economy is self correcting The Great Depression began in 1929 with the crash of the stock market Keynesian Theory is a macroeconomic theory Which is not one of the four main categories of spending identified by John Maynard Keynes transfer payments Breakeven income is when Yd C C 2 8Yd Yd 10 million US NX fall when the growth of the US GDP is faster than ROW If r increases consumption will decrease and savings will increase If US dollar appreciates imports will rise and exports will fall Appreciation of US dollar will result in a decrease in NX and decrease in AD Increase in income taxes will cause decline in Yd and US economy will move down along consumption function graph If Us economy is heading toward a recession the Federal Reserve will lower interest rates