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Business Cycle

Business Cycle. Real GDP Peaks Real GDP stops increasing Troughs Real GDP stops decreasing Expansion/Recovery Recession Must be 2 quarters negative. Business Cycle Theories. Innovation Psychological Inventory Monetary Underconsumption Exogenous External Shock.

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Business Cycle

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  1. Business Cycle • Real GDP • Peaks • Real GDP stops increasing • Troughs • Real GDP stops decreasing • Expansion/Recovery • Recession • Must be 2 quarters negative

  2. Business Cycle Theories • Innovation • Psychological • Inventory • Monetary • Underconsumption • Exogenous • External Shock

  3. Predicting the Business Cycle • Unemployment • Consumer Goods • Durable Goods • Housing • CPI/PPI • Money Supply

  4. Unemployment • People available for work who made a specific effort to find a job during the past month and who, during the most recent survey worked less than one hour for pay.

  5. Unemployment Rate • Number of unemployed/Labor Force • Under reported • Discouraged workers

  6. Types of Unemployment • Frictional • Structural • Cyclical • Seasonal

  7. Full Employment • 4-5% • Why?

  8. Inflation • Rise in general price level

  9. Deflation • Decrease in general price level

  10. Disinflation • Rate of inflation decreasing

  11. Demand Pull Inflation • Excessive demand for goods and services

  12. Cost Push Inflation • Wage Price Spiral • Wage increases lead to higher prices • Profit-push Inflation • Large corporations keep prices high • Supply Side Shock • Oil

  13. Consumer Price Index (CPI) • Increase of price on the consumer level

  14. Producer Price Index (PPI) • Increase of price at the producer level

  15. Market Basket • Check of recipes month to month

  16. Types of Inflation • Creeping • Galloping • Hyper

  17. Misery Index • Combines inflation rate and unemployment rate. • Not a useful economic measure, more of a social measure

  18. The Federal Reserve Federal Reserve Act of 1913 7 Members of Board of Governors 14 year terms Election every 2 years Chairman of the Board 4 year term 12 District banks Board of Governors in Washington DC National bank, privately owned

  19. Districts • http://upload.wikimedia.org/wikipedia/commons/thumb/3/3e/Federal_Reserve_Districts_Map.svg/800px-Federal_Reserve_Districts_Map.svg.png

  20. The Fed’s Main Jobs • Conduct Monetary Policy • Lender of last resort • Issue Currency • Provide banking services to the US Gov’t • Supervise and regulate our financial institutions

  21. Legal Reserve Requirements • Required reserves • Actual reserves • Excess reserves

  22. Reserves • Primary • Secondary

  23. Federal Open Market Committee • People who conduct open market operations • Board of governors (7) • President of NY Fed District Bank • Presidents of 4 other Fed District Banks (rotate)

  24. The Fed’s Policies • Tight Policy • Loose Policy

  25. The Fed’s Tools • Open Market Operations • Reserve Requirement • Discount Rate

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