BEC 5 - Econ & Business Cycles

  1. What are the 2 inputs that increase short-run aggregate supply? What are the results of this increase?
    • CAUSES
    • Input prices decrease
    • Resources become more readily available (raw materials, employee workforce)
    • Increase in production, which increases GDP
    • Decrease in price (deflation) of the product/service
  2. What is the effect of a decrease in short-run aggregate supply?
    Not only is there a decrease in GDP, but there is also an increase in price (there are fewer units produced, but each of those units cost more to make).
  3. What are the effects on GDP, price, & employment for each of the following (1) increase in short-run aggregate supply, (2) increase in aggregate demand, (3) decrease in SRAS, (4) decrease in AD
    • (1) expansion, deflation, employment
    • (2) expansion, inflation, employment
    • (3) contraction, inflation, unemployment
    • (4) contraction, deflation, unemployment
  4. What is the effect of home prices decreasing by 10%?
    Personal wealth decreases, people buy less stuff, results in economic contraction and deflation.
  5. When the following occur, which one shifts (a) SRAS or (b) AD, and what is the effect on the economy: (1) US dollar strengthens, (2) consumer taxes decrease, (3) resources become readily available
    • (1) AD shifts left, contraction, deflation b/c foreign purchasing of our products declines
    • (2) AD shifts right, expansion, inflation b/c we have more money to spend
    • (3) SRAS shifts right, expansion, deflation b/c per unit cost decreases
  6. When the following occur, which one shifts (a) SRAS or (b) AD, and what
    is the effect on the economy: (1) wealth increases, (2) consumer confidence declines, (3) input prices increase
    • (1) AD shifts right; expansion, inflation b/c we have more money to spend
    • (2) AD shifts left; contraction, deflation b/c we're scared to spend money
    • (3) SRAS shifts left; contraction, inflation b/c each unit costs more to produce
  7. When the following occur, which one shifts (a) SRAS or (b) AD, and what
    is the effect on the economy: (1) interest rates increase, (2) government spending increases, (3) the US dollar weakens
    • (1) AD shifts left; contraction, deflation b/c consumers don't take loans and less money is in the system
    • (2) AD shifts right; expansion, inflation b/c more money is the system
    • (3) AD shifts right; expansion, inflation b/c foreigners can now afford our products
  8. The trough of a business cycle is generally characterized by which of the following: productive capacity, investment, purchasing power, shortages of materials
    • unused productive capacity
    • unwillingness to risk investment
  9. What is the marginal propensity to consume (MPC)?
    For every dollar received, a portion will be saved and a portion spent. The MPC is the portion spent.
  10. Nominal GDP means what...
    • N = "Not"
    • Nominal GDP is not adjusted for inflation; it's measured at current prices of the time.
  11. What is the formula to determine the multiplier and the increase in total economic spending?
    • 1 / (1-MPC) = multiplier
    • Multiplier x $ spent = increase in total economic spending
  12. What is the formula for Real GDP?
    (Nominal GDP / GDP deflator) x 100
  13. What is the formula to measure the change in real GDP?
    • (current yr real GDP / past yr real GDP) - 1
    • The typical change formula isn't used because the change in one year to the next occurred when converting nominal GDP into real GDP.
  14. What is a horizontal business combination, what is the benefit?
    When companies in the same industry that produce the same goods / services join together.
  15. What is a vertical business combination?
    When companies at different stages of the production process combine.
  16. What is a circular business combination?
    When different units with relatively remote connections come together under a single management.
  17. What is a diagonal business combination?
    When one company purchases another company that provides ancillary support. (ex=ACorp purchases delivery company BCorp who takes their products to the retailers)
  18. What are the 4 primary methods of acquiring another company and provide a brief explanation?
    • Merger: two entites combine to form a new corp.
    • Acquisition: one company outright buys another; the purchased corp may or may not retain its separate legal entity status
    • Tender Offer: ACorp offers a price/share to shareholders of BCorp
    • Purchase of Assets: ACorp offers to purchase all assets and take on all liabilities of BCorp. Shareholders must approve this deal.
  19. What are the 3 primary methods of disposing of a component or business unit?
    • Sell-off: sale for cash 2° lack of alignment or synergy b/t the two companies
    • Spin-off: creates a new, independent company. No cash involved. Shareholders receive shares in the new company either by a stock dividend (retain shares in the parent) or switching new stock for old stock (no longer retains shares in the parent).
    • Equity Carve-out: creates a new company, offers an IPO but parent corp retains control, selling off a non-controlling interest to raise capital
  20. What is the definition of GDP?
    The total market value of all final goods and services produced within the borders of a nation in a particular period.
  21. What is the definition of a recession?
    When the economy experiences negative real economic growth for two consecutive quarters.
  22. Define (1) leading economic indicators, (2) lagging indicators, and (3) coincident indicators.
    • Leading indicators predict future economic activity.
    • Lagging indicators confirm or dispute previous forecasts and the effectiveness of policy directives.
    • Coincident indicators occur at apprx the same time as the change in economy and are used to identify peaks & troughs.
Card Set
BEC 5 - Econ & Business Cycles
Becker Review