Business Cycles in Macroeconomics

This set of flashcards covers key concepts related to business cycles and macroeconomic policies, providing definitions of essential terms and explanations of economic phenomena.

Business Cycle

• defined by peaks and troughs

Countercyclical Variables

Economic variables that move in the opposite direction of aggregate economic activity.

Stabilization Policies

Policy efforts undertaken to reduce the severity of recessions and sustain economic growth.

Monetary Policy

The process by which the central bank manages the money supply and interest rates to influence economic activity.

Fiscal Policy

Government policy that uses taxation and spending to influence the economy.

Yield Curve

A graph that shows the relationship between interest rates and the time to maturity of debt instruments.

Inversion of the Yield Curve

A situation where the yield curve slopes downward, often seen as a predictor of recession.

Cyclical Behaviour of Economic Variables

• Leading Variable

  • changes before aggregate economic activity

• Coincident Variable

  • moves with the aggregate economic activity

• Lagging Variable

  • moves after aggregate economic activity

• Procyclical

  • move in the same direction

• Countercyclical

  • move in the opposite direction

• Acyclical

  • Do not move with AE activity in a predictable way

Risks associated with bonds

• Default risk: The risk of not getting paid at the time of maturity.

• Term risk: The risk when there’s uncertainty about future interest rates.

• Liquidity risk: The risk that your bond will be hard to sell.

  • Liquidity is the ability to quickly and easily convert an investment into cash

Yield

• Risky assets → higher yield

• bonds with longer yield have higher return