Chapter 10 Business Cycles

These slides supplement the textbook, but should not replace reading the textbook

2

What causes unemployment?

Excessive inventories

3

What causes inflation?

MV/Q = P

4

What causes stagflation?

A move to the left of the aggregate supply curve

5

Decrease in Aggregate Supply

0 Q2 Q1

D

S' P2 P1

S

6

What can cause a shift to the left of the

aggregate supply curve? An increase in costs

7

What can cause an increase in costs?

8

• 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

9

What was the Employment Act of 1946?

Mandated the government to: 1) Balance the budget 2) Favorable balance of payments 3) Stable prices and full

employment 4) Coordinate monetary and fiscal

policies

10

What is Keynesian Economics?

If we can manage demand we can manage the economy

11

What did the 1970s teach us?

A move to the left of the aggregate supply curve can only be solved by supply side remedies

12

What are the four phases of the

business cycle? • Peak • Recession • Trough • Recovery

13

What is the largest component of GDP?

Consumption

14

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

15

What is the acceleration principle?

An increase in spending can lead to induced investments

16

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

17

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

18

What is the Helmsman Dilemma?

Brought on by the lag effects of discretionary fiscal policies

19

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

20

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

21

What past examples of government protecting

big business? • Fannie Mae and Freddie Mac • Bail out of banks in 2008-09 • General Motors and Chrysler

22

What affect does the foreign sector have on

the economy? Can be pro-cyclical or counter-cyclical

23

How do we compare real GDP as a percent

from year to year? We take the percent increase from year to year and compare

24

What is the percent increase as we go

from 3 to 5? 2 / 3 = 67%

25

What is the percent decrease as we go

from 5 to 3? 2 / 5 = 40%

26

What is the circular flow of income and

expenditures? A model that shows the income and expenditures in the economy

27

What are leakages? Any diversion of money

from the domestic spending stream

28

What are examples of leakages? Saving taxes imports

29

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

30

What are examples of injections?

Investment government purchases transfer payments exports

31

At what point is equilibrium reached in

the circular flow model? Where planned leakages equal

planned injections

32

What are two examples of equilibrium in the

circular flow of money? Internal - banks

External – foreign exchange market

33

What happens when planned borrowing

is greater than planned saving? Interest rates rise

34

What happens when planned saving is

greater than planned borrowing?

Interest rates fall

35

What happens when a country has a

payments surplus?

Its currency appreciates

36

What happens when a country has a

payments deficit?

Its currency depreciates

END