Chapter 09 - Business Cycles, Unemployment, and Inflation
9-1
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Chapter 09 - Business Cycles, Unemployment, and Inflation
McConnell, Brue, Flynn, Barbiero Macro 14ce
DISCUSSION QUESTIONS
1. What are the four phases of the business cycle? How long do business cycles last? Why does
the business cycle affect output and employment in capital goods industries and consumer
durable goods industries more severely than in industries producing consumer nondurables?
LO9.1
Answer: The four phases of a typical business cycle, starting at the bottom, are trough,
recovery, peak, and recession. As seen in Table 9.1, the length of a complete cycle varies
from about 2 to 3 years to as long as 15 years.
Because capital goods and durable goods last, purchases can be postponed. This may
happen when a recession is forecast. Capital and durable goods industries therefore
suffer large output declines during recessions. In contrast, consumers cannot long
postpone the buying of nondurables such as food; therefore recessions only slightly
reduce non-durable output. Also, capital and durable goods expenditures tend to be
“lumpy.” Usually, a large expenditure is needed to purchase them, and this shrinks to
zero after purchase is made.
2. How, in general, can a financial crisis lead to a recession? How, in general, can a major new
invention lead to an expansion? LO9.1
Answer: Unexpected financial bubbles (rapid asset price increases) followed by bursts
(abrupt asset price decreases) can spill over to the general economy by contracting
lending and eroding the confidence of consumers and businesses.
For example, the severe recession of 2008-2009 was precipitated by a combination of
excessive money and a financial frenzy in the U.S. that led to overvalued real estate and
unsustainable mortgage debt.The U.S. recession quickly spilled into Canada. Institutions
bundled this debt into new securities (“derivatives”), which were sold to financial
investors, including Canada. Some of the investors in the U.S.in turn bought insurance
against losses that might arise from the securities. As real estate prices plummeted and
mortgage defaults unexpectedly rocketed, the U.S. securitization and insurance structure
buckled and nearly collapsed. Credit markets froze, pessimism prevailed, and spending
by businesses and households tanked.
Significant new products or production methods such as those associated with the
railroad, automobile, computer, and the Internet can rapidly spread through the economy,
sparking sizeable increases in investment, consumption, output, and employment.