L6._Business_cycle_terminology_and_aggregate_spending

What defines trade or business cycles?

Periodic fluctuations in the rate of economic activity, as measured by levels of employment, prices, and production.

What was the average length of business cycles in the UK from 1800 to 1860?

4.3 years.

What is a recession?

A downturn in activity defined as a fall in real GDP for two successive quarters, typically leading to declines in income and employment.

What characterizes the peak phase of a business cycle?

The top of the cycle where productive capacity is fully utilized and shortages may start to develop.

What major economic event was characterized by reaching 3 million unemployed people in 1932?

The Great Depression.

What did Keynes argue was the key to full employment in his General Theory?

Effective demand, which refers to the total demand for goods and services in an economy at a given time.

Define the marginal propensity to consume (MPC).

The change in consumption divided by the change in income, where 0 < ∆C/∆Y < 1.

How is the average propensity to consume (APC) defined?

The ratio of consumption (C) to disposable income (Y).

What is the relationship between the average propensity to save (APS) and average propensity to consume (APC)?

APC + APS = 1.

What are the three major forms of investment described by Keynes?

Investment in inventories, residential housing construction, and in business fixed capital.

What does the aggregate spending function represent?

It shows that total spending in the economy (AE) equals total output (real GDP),

What is the implication of Keynes's model of aggregate expenditure?

It suggests that output is demand-driven rather than supply-driven. In Keynes's model, increased aggregate expenditure can lead to higher output and employment levels, emphasizing the importance of demand in the economy.

What is effective demand?

The total demand for goods and services in an economy at a specific time, driven by consumers' and businesses' willingness and ability to purchase.

What is the formula for the aggregate spending function (AE)?

AE = C + I. C is consumption, and I is investment.