Chapter 12 - Business Cycles

Business cycles

Or economic fluctuations, short-run changes in the growth of GDP

Recession

Episodes of negative economic growth lasting at least two quarters

Expansion

Period of positive growth, these are periods between recessions. They begin at the end of recession and end during the start of next recession

Co-movement

Of many macroeconomic variables. Many variables grow or contract together during booms and busts.

Procyclical - real consumption with real investment and employment move positively

Counter cyclical - variables such as unemployment move negatively or opposite of real GDP

Limited predictability

Of fluctuations. Recessions and expansions the hard to predict since there is no repetitive or easily predictable pattern. Cannot forecast when these will end.

Persistence

In the rate of economic growth. Even though the beginnings and ends of recessions are somewhat unpredictable, economic growth is not random but persistent. When economy is growing, will probably keep growing and vice versa

Expansions last longer than

Recessions

Leading Economic Index

Includes

Yield spread

Compares interest

Okun’s Law

Changes in unemployment rate is equal to -1/2 (g-2%) if gdp is growing at exactly 2% it stays constant, if it grows more than 2% it goes down, if it grows less than 2% then it goes up

Real business cycle theory

emphasizes changes in productivity and technology. Increase in input prices causes recessions. Business cycles are an outcome of market mechanism

Keynesian theory

Looks to change expectations of the future.

sentiments (animal spirits). Expectations about future economic activities. Changes in sentiments affect household consumption. Government can step in to help

Financial and monetary theory

Main proponent is Milton Friedman looks at changes in prices and interest rates

Multipliers

Amplifies effects of any economic shock regardless of source

Market forces

Government policies

Expansionary monetary policy

Will lower interest rates and raise inflation. Lower interest rates will raise spending which shifts the labor demand curve to the right

Fiscal policy

Increase government spending and/or lower taxes