Unit 11 (Economic indicators) & Unit 12 (business cycle)

how does inflation shift during economic cycles?

-when economy is contracting, inflation is low -when economy is recovering, inflation increases but is mild -when economy is in expansion phase, inflation is more prominent (workers are workers, factories are producing). When demand increases, production has trouble meeting demand, which raises prices

Gross national product (GNP)

GDP but includes income received from abroad ex. Dearborn motors, based in Michigan, builds an auto plant in Germany. This would add to the US GNP but not add to GDP

a measure of the change in economic activity that occurs over a given time frame within the boundaries of a nation is that nation's a. GDP b. GNP c. CPI d. industrial production

a. GDP -measure of activity within boundaries of a nation is GDP. GNP is a measure of activity by citizens and entities of a nation. CPI measures inflation. Industrial production is a limited measure of activity

which of the following would be a leading economic indicator a. S&P 500 Index b. industrial production c. duration of unemployment d. GDP

a. S&P 500 index -stock market is a leading indicator, usually in 3-6 month time frames. Industrial production and GDP are coincident indicators. Duration of unemployment is a lagging indicator

inflation is most commonly found during which phase of the business cycle? a. expansion b. peak c. contraction d. trough

a. expansion -when demand for goods is growing faster than supply, inflation most likely occurs

Which state of the business cycle is characterized by rising interest rates and higher wages? a. contraction b. expansion c. recession d. trough

b. expansion -increase in wages and consumer demand signals expansion phase

an economic environment with little or no economic growth, but where inflation is present, is best described as a. deflation b. depression c. stagflation d. stagnation

c. stagflation -presence of inflation with high unemployment is stagflation

lagging economic indicators

change after economy has begun a new trend but serve as confirmation of new trend -corporate profits -average duration of unemployment -ratio of inventories to sales

coincident economic indicators

change direction along with economy as a whole. published after time period has passed and are good confirmation tools of leading indicators -number of hours worked -employment levels -personal income -industrial production -GDP

stagflation

combination of inflation and high unemployment -occurs when economy isn't growing and lack of consumer demand/business activity, but prices are still rising

depression

contraction continuing for 18+ months

Economic data shows that the gross domestic product (GDP) has been declining steadily over the past two quarters. This would suggest A. expansion. B. inflation. C. a depression. D. a recession.

d. recession -when economy contracts for 6+ months, it is a recession

recession

economy enters period of contraction for 6+ months

4 phases of the business cycle

expansion, peak, contraction, trough

Deflation

general decline in prices -occurs during recessions when unemployment is on the rise

inflation

general increase in prices -mild inflation can encourage economic growth bc gradually increasing prices can stimulate business investments -high inflation reduces a dollar's buying power

trough (business cycle)

high unemployment, flat GDP, low inflation, low consumer demand

Expansion phase (business cycle)

increased consumer demand, industrial production, rising stock prices, rising property values, GDP can also be split into 2 phases: recovery and expansion recovery= period of growth from trough to prior peak expansion=economy reaches prior peak and continues to grow

leading economic indicators

indicators that change direction ahead of overall economy -money supply -building permits -avg work week in manufacturing -new orders for consumer goods -stock prices

hyperinflation

inflation that is out of control -severely erodes purchasing power of currency -investors often move cash away from nation -rare

Consumer Price Index (CPI)

measures rate of increase or decrease in a broad range of consumer prices (housing, food, services) -computed each month -used to account for changes in cost of goods to adjust for inflation

GDP

nation's annual economic output, or all goods and services produced in the nation -released quarterly by Commerce department

stagnation

prolonged periods of slow or little economic growth -accompanied by high unemployment

Contraction phase (business cycle)

rising # of bankruptcy and defaults, higher consumer debt, falling stock prices, rising inventory, decreasing GDP

Peak phase (business cycle)

very low unemployment, slowing of inflation, slowing of GDP, steady consumer demand