Economics -- understanding business cycles

**** the austrian/new classical schools but go back to p. 87 to re-read if you really want

**** the austrian/new classical schools but go back to p. 87 to re-read if you really want

How is the consumer price index calculated?

CPI = price of goods in current period ------------------------------------ price of goods in base period

What's the difference between cost-push and demand-pull inflation?

Cost-push stems from SRAS moving leftward (AKA input prices becoming more costly) Demand-pull stems from demand for a good increasing (Both are because inflation is a raise in prices, so raising the two ways demand can shift are through decreasing supply shifts and increasing demand shifts)

How do firms treat capital/workers as output need increases/decreases?

Firms are reluctant to change the amount of workers/capital they have, so they'll either increase or decrease their use before hiring/buying more/less

How do resources vary as an economy moves through a business cycle?

Firms keep inventory. As we reach expansions into peaks, inventory starts to accumulate. Likewise, as we move from recessionary to trough, supplies begins to dissapear (bc you're anticipating not selling much bc it's a recession but it begins to bottom out so you actually sell more than you think)

What is the monetarist school's view?

Monetarists believe that recessionary/expansionary actions stem from inappropriate monetary policy. To avoid this, the central back should follow a steady and consistent monetary supply

What's the neoclassical economic model theory?

Neoclassical = everything moves towards equilibrium, everything wants to be near equilibrium. So when we have a recession, we want to pop back to equilibrium

How is the new keynsian model different from the traditional keynsian model?

New model = more than just wages are sticky

What is unemployed?

Someone who is actively searching for work (Bonus points: long-term unemployed is unemployed for a few months)

What's inflation?

The PERSISTENT increase in price levels over time (note the persistent aspect -- if a price just increases by a few dollars, it's not a big deal).

What's an indication of expansion or recession?

Two consecutive quarters of growth/decline in Real GDP

What is underemployed?

Underemployed = someone who wants to be employed more than they currently are?

What is unit labor costs?

Unit Labor Costs = compensation / output produced by worker

What are the three types of economic indicators within an economy?

1) Leading -- Indicates a future economic cycle 2) Coincident -- indication of an economic cycle happening at the same time 3) Lagging -- indicate a past economic cycle (Note that there are toooons of economic indicator examples, but I think it would be worth skipping memorizing those)

What are the four main business cycles and what are the major impacts on the economy

1) Peak: 2) Recessionary/Contraction: 3) Trough 4) Expansionary

What are the factors of economic activity in the housing sector?

1) mortgage rates -- high/low interest rates have an impact on whether people take them out 2) Housing costs relative to income -- if housing costs are increasing, people will still spend more if their incomes are rising even quicker 3) Speculative activity -- (like in the 2007/2008 housing crash) -- if people anticipate housing costs drastically increasing in the future, they're more likely to purchase houses 4) Demographic factors -- what the youngins (AKA 25 -40 year-olds) are doing

What is deflation?

Deflation = when prices are decreasing

What is disinflation?

Disinflation = the constant decline of inflation (tho note that it isn't equal to 0)

What is expected inflation and how can it lead to the increase in wage prices?

Expected inflation = the increase in prices that workers expect yearly & therefore expect reflected as increases in their salary (related to cost-push inflation since tethered to increasing wage costs)

What are the three main types of unemployment?

Frictional -- caused by a discrepancy in people matching their skillsets to the right job Cyclical -- unemployment caused by the economic business cycle Structural -- caused by people who are permanently unemployed because their skills don't perfectly match economic need

What's the difference between headline and core inflation?

Headline inflation = the increase in prices of all goods Core inflation = the increase in prices of goods with the exception of food and energy (Since these two are incredibly volatile and oftentimes fail to represent the actual inflationary value

How is external trade influenced by changes in the business cycle?

If Domestic GDP increases, people have more income and are therefore better able to purchase things (AKA Imports) If Domestic GDP decreases, people are less able to buy things/other countries are more able to buy things, so exports increase.

What is the inflation rate, and how is it calculated?

Inflation rate is how big/small inflation is growing relative to inflation in past years Inflation rate = % change in prices this year -------------------------------- Inflation last year

What are the underlying theories in the Keynsian model?

Keynsian = economy doesn't move towards recession. People act based on expectations of the future, so business cycles are dictated by future expectations Other component = wages are sticky (people don't like lower wages/fight back against it) so economy doesn't respond well to shift in AS. Therefore, most ways to re-balance the economy are through fiscal/monetary policy that increase aggregate demand)

What is the labor force?

Labor force = all people employed and unemployed

What is a laspeyres index and what are some issues that could come from using it?

Laspeyres index -- basket of goods that are commonly used to evaluate prices. Issues w price index: 1) Doesn't account for incresaed quality driving price increases -- not inflation 2) Doesn't account for new goods that are replaced w old goods 3) switching goods if one thing becomes more expensive and other become less expensive

What are the producer price index and wholesale price index?

PPI = raw goods purchased Wholesale price index = price that consumer purchase

What is the labor force participation ratio?

People employed/seeking employment --------------------------------------------- all people in the economy

What is a price index, and which one is best used for inflation?

Price Index = the defined price for a basket of goods/services Consumer price index is the most commonly used basket of assets used for evaluating inflation

How does productivity change in economic cycles?

Productivity increases as we hit an expansion, and it decreases as we enter a recession (bc remember, firms don't like to hire/fire workers/capital as we go through these phases)

What is hyperinflation?

The rapid persistence of inflation

What are discouraged workers and what do they say about the economy?

Those that are readily employable but aren't seeking employment. If the number of discouraged workers is decreasing, it's a sign that the economy's improving