Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Chap13 sec1


Published on

Published in: Economy & Finance, Technology
  • Be the first to comment

  • Be the first to like this

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