Short-Term Economic Fluctuations: An Introduction

This set of flashcards helps to review key concepts and terms related to short-term economic fluctuations and the business cycle as outlined in the lecture notes.

What are the four phases of the business cycle?

Recession, trough, expansion, and peak.

What characterizes a recession?

A period in which the economy grows at a rate significantly below normal, typically marked by real GDP falling for two or more consecutive quarters.

What is a boom in economic terms?

A strong and long-lasting expansion of the economy.

Define potential output (Y*).

The maximum sustainable amount of output that an economy can produce.

What is the output gap?

Actual output- Potential output/ (potential)

How is cyclical unemployment related to the output gap according to Okun's law?

A one percentage point increase in cyclical unemployment corresponds to a two percent widening of a negative output gap.

What is the natural rate of unemployment (u*)?

The sum of frictional and structural unemployment occurring when cyclical unemployment is zero.

What distinguishes frictional unemployment from structural unemployment?

Frictional unemployment is short-term and related to job matching, while structural unemployment is long-term and due to outdated skills.

What happens to production of durable goods during economic fluctuations?

It is more volatile than that of services and non-durable goods.

What economic indicators are important in dating recessions?

Real personal consumption expenditures, non-farm employment, and real after-tax household income.

In what year did the NBER declare a recession following a prolonged expansion?

February 2020, after an expansion that lasted 128 months.

What impact does a recessionary gap have on output and employment?

It implies that output and employment are below their sustainable levels.

What is the significance of the output gap for policymakers?

It indicates the health of the economy and helps in formulating stabilization policies.

How do self-correcting mechanisms work in the economy?

Firms eventually adjust to output gaps by changing their prices and production levels.

What influences the levels of output in the short run?

Total spending in the economy.

How do changes in total spending at preset prices affect the economy?

Low spending leads to output below potential output, while high spending can lead to inflation.

What is a depression in economic terms?

A particularly severe and prolonged recession.

How does the age structure of the population affect the natural rate of unemployment?

A declining share of younger workers (ages 16-24), who have higher unemployment rates, can reduce the overall natural rate.

What are coincident indicators?

Indicators that move with the overall economy, helping to date recessions.

What measure did the Federal Reserve take in response to inflationary pressure in 1999-2000?

They applied the brakes to slow down the economy.

What are the main reasons output gaps arise?

Markets require time to reach equilibrium, and changes in total spending affect output levels.