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Chapter 11 Business Cycles

Chapter 11 Business Cycles. These slides supplement the textbook, but should not replace reading the textbook. What causes unemployment?. Excessive inventories. What causes inflation?. MV/Q = P. What causes stagflation?. A move to the left of the aggregate supply curve.

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Chapter 11 Business Cycles

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  1. Chapter 11Business 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 S' S P2 P1 D 0 Q2 Q1

  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: • Balance the budget • Favorable balance of payments • Stable prices and full employment • Coordinate monetary and fiscal policies

  10. What isKeynesian 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 arepro-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

  37. END

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