Key Concepts
Discussion and Review Questions
Learning Objective 29.1 Distinguish between economic trends and short‐run fluctuations.
A politician makes the following comment: “The fundamentals of our economy are very strong. According to market economists, we are producing more than anyone expected and even beyond what they call our potential output. My goal is to guarantee that we continue to produce more than our potential output throughout the next few decades.” In the long run, do you think the politician could achieve this goal? Explain your reasoning.
What do economists mean when they say that business cycles are not cycles?
Learning Objective 29.2 Describe the common features of business cycles.
In the first quarter of 2019, the output gap in the United States was 0.8%. Make a prediction about what you think the output gap will be in the second quarter of 2019. Explain your reasoning.
Explain how you can use consumer and business confidence indices to make predictions about the future state of the economy. For example, how would you expect consumer spending to change over the next year if consumer confidence indices have been falling for several months?
Describe some of the historical similarities and differences between recessions. For example, do they always have the same duration and severity? What about expansions?
Learning Objective 29.3 Learn to analyze macroeconomic data.
Explain how you would use the five tips to track the economy to form an outlook of the economy and job market you are hoping to enter after finishing your education. Go online to find data that will help inform your outlook. Hint: bls.gov has excellent information on the outlook of various jobs and FRED has lots of data on economy-wide indicators.
Study Problems
Learning Objective 29.1 Distinguish between economic trends and short‐run fluctuations.
Use the graph of Turkey’s real GDP to answer the following questions.
- In what year(s) did Turkey experience a recession? Explain your reasoning.
- What likely happened to unemployment during the recessions?
Use the accompanying table to answer the following questions.
Year Real GDP (trillions of $) Potential Output (trillions of $) 2014 $17.11 $17.38 2015 $17.46 $17.69 2016 $17.78 $17.99 2017 $18.22 $18.29 2018 $18.77 $18.65 - Calculate the output gap for each year.
- What does it mean when the output gap is negative? What does it mean when it is positive?
- For each year, calculate how much the output gap changed. Compare this to the growth rate of actual output that year, less the growth rate of potential output.
Learning Objective 29.2 Describe the common features of business cycles.
What does it mean if a macroeconomic variable is a leading indicator? A lagging indicator? Give some examples of both leading and lagging indicators..
Assuming the equilibrium unemployment rate is 5%, if actual output falls to 5 percentage points below potential output, how would you expect the unemployment rate to change? (Hint: Use Okun’s rule of thumb.)
Learning Objective 29.3 Learn to analyze macroeconomic data.
For each of the following should you use seasonally adjusted data? Why or why not?
- You are trying to look at economic growth over the past few quarters and you want to figure out the trend so that you can predict growth over the next year.
- You are starting a retail business and want to know how consumer spending changes over the course of the year so that you can hire the appropriate number of staff.
What indicators should you use to track each of the following, and why?
- The overall size of the economy
- Labor market performance
- The future trajectory of economic activity
- Wages and benefits
The S&P 500 has been increasing steadily over the last few months. What does this signal about how investors view future profits? Explain your reasoning.
What do you expect to happen to the S&P 500 if it is announced that GDP grew at an annual rate of 2% last quarter but economists were expecting it to grow at an annual rate of 3%?