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Chapter 11 Business Cycles. These slides supplement the textbook, but should not replace reading the textbook. What causes unemployment?. Excessive inventories. What causes inflation?. MV/Q = P. What causes stagflation?. A move to the left of the aggregate supply curve. - PowerPoint PPT Presentation
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Chapter 11Business Cycles
These slides supplement the textbook, but should not replace reading the textbook
2
What are the four phases of the
business cycle?• Peak• Recession• Trough• Recovery
3
What causes unemployment?
Excessive inventories
4
What causes inflation?
MV/Q = P
5
What causes stagflation?
A move to the left of the aggregate supply curve
6
Decrease in Aggregate Supply
0Q2 Q1
D
S'
P2
P1
S
7
What can cause a shift to the left of the
aggregate supply curve?
An increase in costs
8
What can cause an increase in costs?
9
• Monetizing the debt• > in the price of oil• > in public union benefits• Detailed laws• Emphasis on green technology• Unfunded liabilities• Interest on national debt• Taxes• Tariffs• Health care
10
What can cause deflation?
11
• Quantitative easing low interest rates• High corporate taxes• Double taxation on money earned in
foreign countries• Interest earned on reserves held at
the Fed• Large fines paid to Treasury by big
banks• Interest on national debt• Expectation of lower prices• Lengthy and detailed laws
12
What was the Employment Act of 1946?
Mandated the government to:1)Balance the budget2)Favorable balance of payments3)Full employment4)Coordinate monetary and fiscal
policies
13
What isKeynesian Economics?
If we can manage demand we can manage the economy
14
What did the 1970s teach us?
A move to the left of the aggregate supply curve can only be solved by supply side remedies
15
What is the largest component of GDP?
Consumption
16
What is investment?The purchase of new plants, equipment, buildings, and net additions to inventories
17
What is the acceleration principle?
An increase in spending can lead to induced investments
18
Why is the investment sector so unstable?
• Expectations can change• Inconsistent accelerator• A change in the rate of
growth determines swings• Govt. policies can cause
economic bubbles
19
What arepro-cyclical
government polices?Policies that can accentuate the swings of the business cycle because of lag effects and emphasis of anti-growth policies
20
What is the Helmsman Dilemma?
Brought on by the lag effects of discretionary fiscal policies
21
What is the Financial Stability Oversight Council?
As part of the Financial Reform Bill of 2010 (Dodd-Frank Bill) the council decides which nonbank financial institutions might cause instability in the U.S. financial system
22
What is the significance of the FSOC?
All banks with assets of more than $50 billion and any other financial businesses deemed large enough will be regulated by the Fed and protected with promise of bailouts if they get into financial trouble
23
What past examples of government protecting
big business?• Fannie Mae and Freddie Mac• Bail out of banks in 2008-09• General Motors and Chrysler
24
What affect does the foreign sector have on
the economy?Can be pro-cyclical or counter-cyclical
25
How do we compare real GDP as a percent
from year to year?We take the percent increase from year to year and compare
26
What is the percent increase as we go
from 3 to 5?2 / 3 = 67%
27
What is the percent decrease as we go
from 5 to 3?2 / 5 = 40%
28
What is the circular flow of income and
expenditures?A model that shows the income and expenditures in the economy
29
What are leakages?Any diversion of money
from the domestic spending stream
30
What are examples of leakages?
Savingtaxes
imports
31
What are injections?
Any payment of money into the economic stream
32
What are examples of injections?
Investmentgovernment purchasestransfer paymentsexports
33
At what point is equilibrium reached in
the circular flow model?Where planned leakages equal
planned injections
34
What are two examples of equilibrium in the
circular flow of money?Internal - banks
External – foreign exchange market
35
What happens when planned borrowing
is greater than planned saving?
Interest rates rise
36
What happens when planned saving is
greater than planned borrowing?
Interest rates fall
37
What happens when a country has a
payments surplus?
Its currency appreciates
38
What happens when a country has a
payments deficit?
Its currency depreciates
END