200910 Chapter 12: finance week 12 - Google Docs

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nellyxo20

6 Jun 2018

School

UWS

Department

University of Western Sydney

Course

200910

Professor

Neha

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week12money,interestrates,businesscycleandeconomicpolicy



Understandwhathappensduringthebusinesscycle.

Themeaningandfunctionsofmoney:whatisthisthingcalled

‘money’?

ThefinancialsysteminAustralia:wheredobanksandother

financialinstitutionsfitin?4.Thesupplyofmoney:howisit

measuredandwhatdeterminesitssize?

5)Thedemandformoney:howmuchmoneydowewanttoholdat

anyonetime?

6.6)Equilibrium:whateffectdoesthedemandandsupplyofmoney

haveoninterestrates?



   

1)Thebusinesscyclereferstoperiodsofeconomicexpansionand

economiccontractionrelativetothetrendrateofeconomicgrowth.



Theexpansionphase—production,employmentandincomeareincreasing

abovetrendgrowth.



Theperiodofexpansionendswithathebusinesscyclepeak.



Thecontractionphase—production,employmentandincomearefalling

belowtrendgrowth.



Thecontractionphasemaybefollowedbyarecession,whichoccurswhen

totalproductionandemploymentaredecreasingandtherateofeconomic

growthisnegative.



Thecontractionorrecessioncomestoanendwithabusinesscycletrough,

afterwhichanotherperiodofexpansionbegins.



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Recession:Definedasasignificantdeclineineconomicactivityspread

acrosstheeconomy,lastingmorethanafewmonths,visibleinindustrial

production,employment,realincomeandwholesaleretailtrade.

Technicaldefinitionofrecession:Twosuccessivequarters(sixmonth)of

negativeeconomicgrowth



Whathappensduringbusinesscycle?



Eachbusinesscycleisdifferent.Thelengthsoftheexpansionand

contractionphasesandwhichsectorsoftheeconomyaremostaffectedwill

rarelybe(not)thesameinanytwocycles.Butmostbusinesscyclesshare

certaincharacteristics:



Astheeconomynearstheendofanexpansioninterestratesareusually

rising,andthewagesofworkersareusuallyrisingfasterthanprices.Asa

resultofrisinginterestratesandrisingwages,theprofitsoffirmswillbe

falling.Typically,towardstheendofanexpansionbothhouseholdsand

firmswillhavesubstantiallyincreasedtheirdebts.Thesedebtsarethe

resultoffirmsandhouseholdsborrowingtohelpfinancetheirspending

duringtheexpansion.



Aneconomiccontractionwilloftenbeginwithadeclineinspendingbyfirms

oncapitalgoods,suchasmachineryandequipment,orbyhouseholdson

newhousesandconsumerdurables,suchasfurnitureandcars.As

spendingdeclines,firmssellingcapitalgoodsandconsumerdurableswill

findtheirsalesdeclining.Assalesdecline,firmscutbackonproduction

andbegintolayoffworkers.Risingunemploymentandfallingprofits

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reduceincome,whichleadstofurtherdeclinesinspending,anda

recessionmayoccur.



Peoplepostponebuyingdurables,particularlyexpensiveitemssuchas

newcars,duringacontractionorrecession.



Theeffectsofbusinesscycleoninflationrate



Duringeconomicexpansionstheinflationrateusuallyincreases.

–Exception:Iftheexpansionisduetorisingproductivitylevelsandan

expansionofpotentialGDP.



Duringcontractionstheinflationrateusuallydecreases.Exception:Ifthe

recessioniscausedbyasupplyshock.



Theeffectsofbusinesscycleonunemploymentrate

Contractionsandrecessionscausetheunemploymentratetoincrease.



Therateofunemploymentcontinuestoriseafterarecessionisover,

because:

–discouragedworkersreenterthelabourforce.–firmscontinueto

operatebelowcapacityaftertherecessionisoverandmaynotrehire

workersforsometime.



Contractionsandrecessionsarepartlyduetobusinesscyclesandpartly

duetoeconomicshocks.TheAustralianexperience:



1974:Oilpriceshock—OPEC.

1990:Governmentinducedrecessionduetohighinterestrates.2007/08:

Globalfinancialcrisis—creditshortage.



Whyarebusinesscyclefluctuationslesssevere?



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