Chapter 8 Business Cycles

Business Cycle

Economic fluctuations between contractions and expansions in a repeated fashion

How the Keynesian Model Respond to Business Cycles

Believe the government should interfere in business cycles to smoothen them

How the Classical Model Responds to Business Cycles

Believe that the government shouldn’t interfere in business cycles as they run ok on their own

Expansion

Upswing of business cycle towards a peak

Contraction

Downswing of a business cycle towards a trough

When Economy weakens

Declining sales and production, and less workers

Fluctuations

Business Cycles are _____ of aggregate economic activity, not a specific variable

Contractions

Business Cycles feature Expansions and _______

Contraction/recession

Period of time in which aggregate economic activity is falling

Expansion/Boom

Period of time in which aggregate economic activity is increasing

Depression

Severe recession

Trough

Low point of contraction

Peak

High point of expansion

Persistence

Tendency for declines in economic activity followed by further declines

Declines are followed by further declines

Once a recession begins, the economy keeps contracting for a period of time

Growth is followed by more growth

Once an expansion begins, the economy keeps expanding for a while

Because of persistence

Economic forecasters are always on the lookout for turning points, which are likely to indicate a change in the direction of economic activity.

Dating of Turning Points

Comes well after a peak or trough

Judgements of forecasts

Beneficial to historical analysis of business cycles and current policymaking

Canadian Business Cycle(1878-1914)

Suffered as many months of contractions as it did months of expansions, estimated 11 recessions over this period

Canadian Business Cycles(1915-1937)

Two major contractions during this period. Employment rose from 3% to 20% in the latter half due to serious economic decline in which stock market collapsed and many farmers went bankrupt.

Canadian Business Cycles(1938-1945)

Employment went from 20% to 2%. Real GDP doubled and the months of expansion outnumbered months of contraction by 5x.

Canadian Business Cycles(1946-now)

Recessions became less severe with many more periods of straight expansions rather than a sequence of expansions and contractions. Most employment rose was from 5.9% to 8.6% in which real output per capita fell by 3.8%.

Procyclical Variable

Moves in the same direction as aggregate economic activity. Ups in expansions, downs in contractions

Countercyclical Variable

Moves in opposite direction to aggregate economic activity. Ups in contraction, down in expansions

Acyclical Variable

Does not display a clear pattern over the business cycle

Leading Variables

Turning Points occur before those of the business cycle

Coincident Variable

Occurs at the same time as those of business cycles

Lagging Variable

Turning points occur later than those of business cycle

Recessions are caused by

Large unpredictable shocks(disruptions in oil supply, outbreak of disease, and extreme weather). None of which are usual

Industrial Production

Production

Procyclical direction with coincident timing

Consumption, Imports, and Business fixed investment

Expenditure

Procyclical direction with coincident timing

Inventory investment

Expenditure

Procyclical direction with leading timing

Employment

Labor market variables

Procyclical direction with coincident timing

Average Labor Productivity

Labor Market Variables

Procyclical direction with leading timing

Unemployment

Labor Market Variables

Countercyclical direction with coincident timing

Real wage

Labor Market Variables

Acyclical direction

Money growth

Money Growth and Inflation

Procyclical direction with leading timing

Inflation

Money Growth and Inflation

Procyclical direction with lagging timing

Stock Prices

Financial Variables

Procyclical direction with leading timing

Nominal interest rates

Financial Variables

Procyclical direction with lagging timing

Real interest rates

Financial Variables

Acyclical direction

Production

Coincident and procyclical variable

Producers of long lasting/durable goods or capital goods

More sensitive to the business cycle

Producers of short-lived/nondurable goods or services

Less sensitive to business cycle

Fixed Investment and residential investment

Strongly procyclical and coincident

Strongly Volatile

Inventory Investment is procyclial, leading, and _________

Foreign business cycles

Export expenditures are largely a reflection of _____________, not Canada’s

Trade Balance

Business cycles are often transmitted between countries through the ________

Real Wage

Compensation received by workers per unit of time measured in real, or purchasing power, terms.

Important to business cycles because its one of the main determinants of the amount of labor supplied by workers and demanded by firms

Recessions of 1981–1982 and 1990–1992

Associated with slowdowns in money growth

Recession of 2008–2009

Associated with expansion in money growth