Chap13 sec1

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Chap13 sec1

  1. 1. Chapter 13 – Economic Instability Section 1 – Business Cycles and Fluctuations
  2. 2. Vocabulary O Business cycles – regular ups and downs of real GDP O Business fluctuations – rise and fall of real GDP over time in an irregular manner O Recession – first phase of business cycle; period during which real GDP declines for at least 2 quarters O Peak- where recession begins; point where real GDP stops going up
  3. 3. Vocabulary O Trough – where recession ends; the turnaround point where real GDP stops going down O Expansion – second phase of business cycle; period of recovery from recession O Trend line – steady growth path that economy would follow if periods of recession and expansion did not occur O Depression – state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants
  4. 4. Vocabulary O Depression scrip – unofficial currency that towns, chambers of commerce, and other civic bodies issued O Leading economic indicator – a statistical series that normally turns down before the economy turns down and vice versa O Composite index of leading economic indicators – monthly statistical series that uses a combination of 10 individual indicators to forecast changes in real GDP O Econometric model – mathematical model that uses algebraic equations to describe how the economy behaves
  5. 5. Business Cycles: Characteristics and Causes O Phases of Business Cycle: O See illustration O Most agree the Great Depression of 1930’s was only US depression in 20th century O Changes in Investment Banking O When economy is expanding, businesses expect future sales to be high, so they invest heavily in capital goods O When companies start to cut back, this can lead to layoffs and recession
  6. 6. Business Cycle (con’t) O Innovation and Imitation O When a business innovates, it has an edge on competitors and sales go up O Other businesses follow and investment increases O Once the innovation takes hold, economic activity may slow down O Monetary Policy Decisions O When the Fed lowers interest rates, it becomes easier for private sector to borrow and invest O External Shocks O Wars, increase in oil price, international conflict (9/11 attacks)
  7. 7. Forecasting Business Cycles O Example of a leading economic indicator: length of average work week O If people work fewer hours, this may signal a recession O Composite index of leading economic indicators (LEI) is made up of 10 individual indicators that forecast change in GDP O Can predict recessions that never happen O On average, index turns down 9 months before recession O On average, index turns up 4 months before recovery

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