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Transcript of Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the...
![Page 1: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/1.jpg)
Chapter 11Business Cycles
These slides supplement the textbook, but should not replace reading the textbook
![Page 2: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/2.jpg)
2
What are the four phases of the
business cycle?• Peak• Recession• Trough• Recovery
![Page 3: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/3.jpg)
3
What causes unemployment?
Excessive inventories
![Page 4: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/4.jpg)
4
What causes inflation?
MV/Q = P
![Page 5: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/5.jpg)
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What causes stagflation?
A move to the left of the aggregate supply curve
![Page 6: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/6.jpg)
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Decrease in Aggregate Supply
0Q2 Q1
D
S'
P2
P1
S
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What can cause a shift to the left of the
aggregate supply curve?
An increase in costs
![Page 8: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/8.jpg)
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What can cause an increase in costs?
![Page 9: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/9.jpg)
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• 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
![Page 10: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/10.jpg)
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What can cause deflation?
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• 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
![Page 12: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/12.jpg)
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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
![Page 13: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/13.jpg)
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What isKeynesian Economics?
If we can manage demand we can manage the economy
![Page 14: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/14.jpg)
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What did the 1970s teach us?
A move to the left of the aggregate supply curve can only be solved by supply side remedies
![Page 15: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/15.jpg)
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What is the largest component of GDP?
Consumption
![Page 16: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/16.jpg)
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What is investment?The purchase of new plants, equipment, buildings, and net additions to inventories
![Page 17: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/17.jpg)
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What is the acceleration principle?
An increase in spending can lead to induced investments
![Page 18: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/18.jpg)
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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
![Page 19: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/19.jpg)
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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
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What is the Helmsman Dilemma?
Brought on by the lag effects of discretionary fiscal policies
![Page 21: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/21.jpg)
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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
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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
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What past examples of government protecting
big business?• Fannie Mae and Freddie Mac• Bail out of banks in 2008-09• General Motors and Chrysler
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What affect does the foreign sector have on
the economy?Can be pro-cyclical or counter-cyclical
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How do we compare real GDP as a percent
from year to year?We take the percent increase from year to year and compare
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What is the percent increase as we go
from 3 to 5?2 / 3 = 67%
![Page 27: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/27.jpg)
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What is the percent decrease as we go
from 5 to 3?2 / 5 = 40%
![Page 28: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/28.jpg)
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What is the circular flow of income and
expenditures?A model that shows the income and expenditures in the economy
![Page 29: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/29.jpg)
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What are leakages?Any diversion of money
from the domestic spending stream
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What are examples of leakages?
Savingtaxes
imports
![Page 31: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/31.jpg)
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What are injections?
Any payment of money into the economic stream
![Page 32: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/32.jpg)
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What are examples of injections?
Investmentgovernment purchasestransfer paymentsexports
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At what point is equilibrium reached in
the circular flow model?Where planned leakages equal
planned injections
![Page 34: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/34.jpg)
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What are two examples of equilibrium in the
circular flow of money?Internal - banks
External – foreign exchange market
![Page 35: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/35.jpg)
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What happens when planned borrowing
is greater than planned saving?
Interest rates rise
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What happens when planned saving is
greater than planned borrowing?
Interest rates fall
![Page 37: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/37.jpg)
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What happens when a country has a
payments surplus?
Its currency appreciates
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What happens when a country has a
payments deficit?
Its currency depreciates
![Page 39: Chapter 11 Business Cycles These slides supplement the textbook, but should not replace reading the textbook.](https://reader036.fdocuments.us/reader036/viewer/2022062320/56649d825503460f94a6847c/html5/thumbnails/39.jpg)
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