IV a What are the two ways to represent the business cycle o

IV. a) What are the two ways to represent the business cycle on the graphs and to show the GDP gaps? Draw both and give your explanations b) What is the difference between procyclical, countercyclical and acyclical variables? Explain. Define the type of each variable listed below (Instruction: do not rewrite the list, just put the numbers for each type) (i) budget deficit; (ii) firms profits; (iii) consumption spending; (iv) number of unemployed; (v) budget revenues; (vi) net exports; (vii) interest rate; (viii) business inventories; (ix) exports; (x) aggregate incomes; (xi) sum of unemployment insurance payments; (xii) price level; (xiii) sum of pension payments; (xiv)investment spending; (xv) private sector saving; (xvi) imports; (xvii) demand for money; (xviii) indirect tax revenues; (xix) government purchases; (xx) financial assets prices; (xxi) rate of depreciation; (xxii) real estate prices; (xxiii) supply of loanable funds

Solution

b) A procyclical variable moves in the same direction as aggregate economic activity. A countercyclical variable moves oppositely to aggregate economic activity.An acyclical variable does not display a clear pattern over the business cycle.

(i) A budget defecit is an indicator of an economy which defines expenditure exceeds revenue.It is the difference between all receipts and expenses in revenue and govt. capital account

(ii) A firm makes profit , when its total revenue exceeds total cost in the long run. It is necessary for a firm to make profit to continue producing goods and survive in the industry.

(iii) Housholds buy goods and services in order to fulfill their needs with money as medium of exchange. Basically Consumer spending is which consumers spends to purchase the required goods and services

(iv) The no. of unemployed of a country can be defined by the difference of Total labour force and no. of employed person

(v) The money allocated for maintenance and growth of business is revenue of budget. A revenue budget managed efficient allocation of resources and is the result of a business\'s forecasts of sales revenue, expenses and capital expenditures.

(vi) Net export is the difference between a country\'s total export and the country\'s total import. It is used to calculate the Gross Deomestic Product of the country

(vii) The interest rate is the percent of principal charged by the lender for the use of its money. Banks pay interest rate , when we deposit money , as the bank is now borrower and we are the lender.

(viii) The collection of products that are avaiable to sell to businesses or consumers.

(ix) The total amount of goods or services that are sold in foreign markets, defined export.

(x) Aggregate income is total of all income of a country. It includes all the factors (i.e inflation,taxation) without adjustment.

(xi) The insurance is a govt. welfare policy, where a empolyed person becomes unemployed though not for his personal fault and because of some market or economical problems, that person then receives a stipend from govt. while searching for new job.

(xii) A price level is the average of current prices across the entire spectrum of goods and services produced in the economy

(xiii) The sum of pesion payments is which a employer is promised to get on retirement that is predetermined by a formula based on the employee\'s earnings history, tenure of service and age, rather than depending directly on individual investment returns.

( xiv) Investment Spending is an attempt to stimulate production by means of capital goods that are created or acquired

(xv) Private sector saving is the amount by which disposable income (income, Y, minus tax revenue, T) exceeds private spending. This can be seen by noting that S = (Y – T) – C, where C is private consumption expenditure, which in turn implies S – I = (Y – T) – (C + I)

(xvi) When A country purchases goods and services from foreign country\'s, that is called import.

(xvii) Demand for money is the desired holding of financial assets in the form of money,that is, cash or bank deposits rather than investments.

(xviii) The revenue collected from an indirect tax( sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

(xix) Government purchases are expenditures and gross investment by federal, state and local governments, excluding transfer payments and interest on debt.

(xx) The amount one pays for an asset when buying it. The price represents the amount of value the market has assigned,fairly or unfairly, to an asset. Normally, prices are expressed in terms of money.

(xxi) The depreciation rate is the percentage rate at which an asset is depreciated. A company determines the depreciation rate by dividing the depreciated cost of an asset by the number of years of its useful life.

(xxii) Real estate is a property ,i.e land or house on it. Real estate price is the sums of money for which that may be bought or sold.

(xxiii) Loanable funds is the sum total of all the money people and entities in an economy have decided to save and lend out to borrowers as an investment rather than use for personal consumption.Dishoarding is a source of supply of loanable funds.