Understanding Business Cycles Flashcards Preview

CFA Level 1 - Quantitative Methods > Understanding Business Cycles > Flashcards

Flashcards in Understanding Business Cycles Deck (41)
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1
Q

Real GDP and Unemployment are key variables used to determine the current phase of the business cycle

A

2
Q

Four Stages of a Business Cycle

A
  1. Expansion
  2. Peak
  3. Contraction/Recession
  4. Trough
3
Q

Inventories are used as an important business cycle indicator.

A
  • In Inventories accumulate when expansion is reaching peak

* Inventories deplete when contraction is reaching the trough

4
Q

As Expansion is approaching its peak

A
  • Sales growth slows

* * Inventories accumulate

5
Q

As Contraction is reaching the trough

A
  • Sales growth begins to increase

* * Inventories deplete

6
Q

Housing Sector Influence on Business Cycle

A
  • Mortgage Rates – when interest rates are low, they tend to increase home buying and construction
  • Housing costs relative to income – when incomes are cyclically high relative to home costs, home buying and construction tend to increase.
  • Speculative Activity – rising home prices can be bought on expectation of further gains.
  • Demographic Factors – proportion of population in the 25 to 40 year old demographic is positively related to activity in the housing sector.
7
Q

External Trade Sector Activity

A
  • domestic GDP growth
  • GDP growth in trading partners
  • currency exchange rates
8
Q

Characteristics of a Trough

A
  • GDP growth rate goes from - to +
  • High unemployment, overtime increases
  • Spending on durables and housing increase
  • Moderate or decreasing inflation
9
Q

Characteristics of Expansion

A
  • GDP ^, Unemployment decreases
  • Investment ^ (by firms and consumers)
  • Inflation ^
  • Imports ^, (more $$ for demand to ^)
10
Q

Characteristics of a Peak

A
  • GDP decreases, Unemployment decreases, but slows
  • Spending and business investment slows
  • Inflation ^
11
Q

Characteristics of a Contraction/Recession

A
  • GDP decreases, Unemployment ^
  • Spending and Investment decrease
  • Inflation decrease, with a lag
  • Imports decrease as income growth slows
12
Q

Neoclassical Theory

A
  • Shifts in Aggregate Demand and Aggregate Supply are driven by changes in technology
  • Business Cycles are temporary deviations from LR equilibrium
13
Q

Keynesian Theory

A
  • Fluctuations are primarily due to swings in levels of optimism of those who run businesses
  • Increase in Aggregate Demand directly through monetary or fiscal policy
14
Q

New Keynesian Theory

A
  • Keynesian School, plus prices of production inputs other than labor are “downward sticky” presenting additional barriers to reaching full employment.
15
Q

Monetarist Theory

A

Aggregate Demand that causes business cycles are caused by rate of growth of Money Supply likely from inappropriate decisions by monetary authorities.

16
Q

Austrian School Theory

A

Business cycles are caused by government intervention in the economy

17
Q

New Classical Theory (Real Business Cycle Theory)

A

RBC theory emphasizes economic changes likely technological adaptation and external shocks. Not monetary variables.

18
Q

3 categories of Unemployment

* Unemployed means they are proactively looking for a job

A
  1. Frictional
  2. Structural
  3. Cyclical
19
Q

Frictional Unemployment

A

results from time lag necessary to match employees who seek work with employers need their skills

20
Q

Structural Unemployment

A

LR changes in the economy that eliminate jobs and/or add jobs unemployed do not have the skills for.

21
Q

Cyclical Unemployment

A

Caused by changes in the general level of economic activity

22
Q

Unemployment Rate

A

The percentage of people in the labor force who are unemployed

23
Q

Labor Force

A

All people who are either employed or unemployed

24
Q

Discouraged Workers

A

Those who are available for work but chose not to get employed and are not seeking a job

25
Q

Inflation

A

Persistent increase in price level over time.

26
Q

Deflation

A

Associated with deep recessions

27
Q

Consumer Price Index

A

CPI represents the purchasing patterns of an urban household.

CPI = [(cost of basket @ current prices) / (cost of basket @ base prices)] * 100

28
Q

GDP deflator

A

Also used as an inflation estimator

29
Q

Producer Price Index (PPI)

A

Watches for different stages of processing to identify emerging price pressures

30
Q

Headline Inflation

A

Refers to price indexes for all goods

31
Q

Core Inflation

A

Price indexes that exclude food and energy, because they are more volatile

32
Q

Laspeyres Index

A

Uses a constant basket of goods and services to measure inflation

33
Q

3 factors that cause Laspeyres Index to be biased upwards

A
  1. New goods – Old goods replaced by newer, more expensive goods trending the index ^
  2. Quality Index – If quality of index ^, the price of the index ^. Biasing the index up, when the prices didn’t inflate.
  3. Substitution – cheaper products that will replace more expensive goods changes.
34
Q

Hedonic Pricing

A

Adjusts a price index for product quality

35
Q

For substitution, Fischer Index is used as a chain-weighted price index.

A

Fisher Index is a geometric mean of Laspeyres Index and Paasche Index.

36
Q

Paasche Index uses the current consumption weights, prices from the base period and prices in the current period

A

PI = current price / (base period)

37
Q

Cost-push inflation

A

Results from a decrease in Aggregate Supply, caused by an increase in the real price of an important factor of production, such as wages or energy.

38
Q

Demand-Pull Inflation

A

Results from an increase in money supply, increased gov’t spending or any change in Aggregate Demand

39
Q

Leading Indicators

A

Change direction before peaks and troughs in business cycles

ex. Average weekly hours,
Stock Prices,
Leading Credit Index
Index of Consumer Expectations

40
Q

Coincident Indicators

A

Change direction at roughly the same time as peaks or troughs

ex. Employees on nonagricultural payrolls
Personal Income less transfer payments
Industrial Production

41
Q

Lagging Indicators

A

Don’t change directions until after peaks and troughs

ex. Average rate of unemployment
Commerical and Industrial Loans
CPI for services
Labor cost per unti