Chapter 11 Business Cycles

1
Chapter 11Business Cycles
These slides supplement the textbook, but should
not replace reading the textbook
2
What are the four phases of the business cycle?

• Peak
• Recession
• Trough
• Recovery

3
What causes unemployment?

• Excessive inventories

4
What causes inflation?

• MV/Q P

5
What causes stagflation?

• A move to the left of the aggregate supply curve

6
Decrease in Aggregate Supply
S'
S
P2
P1
D
0
Q2
Q1
7
What can cause a shift to the left of the
aggregate supply curve?

• An increase in costs

8
What can cause an increase in costs?
9

• Monetizing the debt
• gt in the price of oil
• gt in public union benefits
• Detailed laws
• Emphasis on green technology
• Unfunded liabilities
• Interest on national debt
• Taxes
• Tariffs
• Health care

10
What can cause deflation?
11

• Quantitative easing low interest rates
• High corporate taxes
• Double taxation on money earned in foreign
  countries
• Interest earned on reserves held at the Fed
• Large fines paid to Treasury by big banks
• Interest on national debt
• Expectation of lower prices
• Lengthy and detailed laws

12
What was the Employment Act of 1946?

• Mandated the government to
• Balance the budget
• Favorable balance of payments
• Full employment
• Coordinate monetary and fiscal policies

13
What isKeynesian Economics?

• If we can manage demand we can manage the economy

14
What did the 1970s teach us?

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

15
What is the largest component of GDP?

• Consumption

16
What is investment?

• The purchase of new plants, equipment, buildings,
  and net additions to inventories

17
What is the acceleration principle?

• An increase in spending can lead to induced
  investments

18
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

19
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

20
What is the Helmsman Dilemma?

• Brought on by the lag effects of discretionary
  fiscal policies

21
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

22
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

23
What past examples of government protecting big
business?

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

24
What affect does the foreign sector have on the
economy?

• Can be pro-cyclical or counter-cyclical

25
How do we compare real GDP as a percent from year
to year?

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

26
What is the percent increase as we go from 3 to 5?

• 2 / 3 67

27
What is the percent decrease as we go from 5 to 3?

• 2 / 5 40

28
What is the circular flow of income and
expenditures?

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

29
What are leakages?

• Any diversion of money from the domestic spending
  stream

30
What are examples of leakages?

• Saving
• taxes
• imports

31
What are injections?

• Any payment of money into the economic stream

32
What are examples of injections?

• Investment
• government purchases
• transfer payments
• exports

33
At what point is equilibrium reached in the
circular flow model?

• Where planned leakages equal planned injections

34
What are two examples of equilibrium in the
circular flow of money?

• Internal - banks
• External foreign exchange market

35
What happens when planned borrowing is greater
than planned saving?
Interest rates rise
36
What happens when planned saving is greater than
planned borrowing?
Interest rates fall
37
What happens when a country has a payments
surplus?
Its currency appreciates
38
What happens when a country has a payments
deficit?
Its currency depreciates
39
END