Econ 14-1 Business cycles and fluctuations

What are the 5 causes of the business cycle?

1) Capital Expenditures 2) inventory adjustments 3) innovation and imitation 4) monetary factors 5) external shocks

What are the causes of the Great Depression?

1) the disparity in the distribution of income. The poor had no money to buy goods to stimulate the economy 2) Easy and plentiful credit. When the crash happened, people in debt had nothing to fall back on. 3) Global economic conditions. US companies pulled money from Europe which made European countries unable to but American goods. 4) high American tariffs on imports. This kept countries from selling goods to the U.S.

Index of leading indicators

A monthly statistical series that usually turns down before the real GDP turns down, and turns up before the real GDP turns up.

Recession

A period during which real GDP declines for 2 quarters or 6 consecutive months

Expansion

A period of recovery from a recession. Expansion continues until the economy reaches a new peak

Depression

A state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants.

Trend line

A steady growth path when a period of recession and expansion did not occur

External shocks

External shocks can be increase in oil prices, war, international conflict. Which can for a short time, drive the economy up. Shocks can also be negative which causes a down turn.

Economic model

It's a macroeconomic model that uses algebraic equations to describe how the economy behaves

Inventory adjustments

Some businesses cut back on inventory when there is a sign of economic slowdown, and then build inventory back up when economy is in an up turn. This causes the GDP to fluctuate

Business cycles

Systematic ups and downs of real GDP

Peak

The point where the real GDP shops going up

Business fluctuations

The rise and fall of real GDP over time in a non systematic manner

What is the beginning of the Great Depression

The stock market crash on October 29, 1929 or Black Tuesday

Trough

The turnaround point where the real GDP stops going down

Innovation and imitation

When a company innovates, it gains an edge on its competition because the cost goes down and the sales go up. The business grows. Other companies In order to compete, they need to imitate. They do this by investing heavily. After the innovation takes hold in the market sales slow down which can cause a recession.

Monetary factors

When money is easy to get, interests rates are low and loans are easy to get. This stimulates the economy for a short time. The increase demand for loans cause interest rates to rise which discourages new borrowers.

Depression scrip

When money was in short supply that towns, chamber of commerces printed their own money. This money was used to pay teachers, police officers, firefighters and municipal employees.

Capital Expenditures

When the economy is expanding a company invests back into the company. When the economy starts to slow down, the company pulls back which can cause a recession.