A full-employment equilibrium occurs when equilibrium real GDP equals potential GDP.

Over the business cycle, real GDP fluctuates around potential GDP because the quantity of labor employed fluctuates around the full employment level. Potential GDP is illustrated as a vertical line because it does not change when the price level changes.

Potential GDP represents the center of the business cycle. Real GDP rises and falls in relation to this center through business cycles.

The Conference Board, a global business research association, identifies three main classes of business cycle indicators, based on timing: leading, lagging and coincident indicators.

Leading indicators measure economic activity in which shifts may predict the onset of a business cycle. Examples of leading indicators include average weekly work hours in manufacturing, factory orders for goods, housing permits and stock prices. Changes in these metrics could signal a shift in business cycle.

5. Which of the following is a leading business cycle indicator? The unemployment rate.

During a recession, economic activity slows, wages drop, and unemployment rises. Eventually, the economy will begin to stabilize and enter the trough period before beginning the next expansion. In a healthy economy, expansions are the norm with recessions being short and infrequent.

The government has two tools at its disposal to moderate the short-term fluctuations of the business cycle—fiscal policy or monetary policy. Fiscal policy refers to changes in the budget deficit. Monetary policy refers to changes in short-term interest rates by the Federal Reserve.

Increased consumer spending, increased international trade, and businesses that increase their investment in capital spending can all impact the level of production of goods and services in an economy. For example, as consumers buy more homes, home construction and contractors see increases in revenue.

The period marked from trough to peak. Peak: The upper turning point of a business cycle and the point at which expansion turns into contraction. Contraction: A slowdown in the pace of economic activity defined by low or stagnant growth, high unemployment, and declining prices.

In general, the typical business cycle demonstrates the following: During the typical early-cycle phase, the economy bottoms out and picks up steam until it exits recession then begins the recovery as activity accelerates.

Answer: When aggregate economic activity is increasing, the economy is said to be in (1) an expansion.

We anticipate that as we move into 2021, US Industrial Production will transition to Phase A, Recovery. This phase of the business cycle will likely characterize the first half of the year before the next transition occurs and Phase B, Accelerating Growth, characterizes the remainder of 2021.

Money has three primary functions. It is a medium of exchange, a unit of account, and a store of value: Medium of Exchange: When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. Additionally, the value of money must remain stable over time.

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or “backed” by a commodity.

There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy.

ER = excess reserves = R – RR. M1 = money supply = C + D. MB = monetary base = R + C. m1 = M1 money multiplier = M1/MB.

The money multiplier tells you the maximum amount the money supply could increase based on an increase in reserves within the banking system. The formula for the money multiplier is simply 1/r, where r = the reserve ratio.

The maximum amount by which demand deposits can expand is given by the equation: ADD = AER/r. ADD is the expansion of demand deposits, AER is the excess reserves in the banking system, and r is the required reserve ratio. Thus, the maximum amount by which demand deposits can expand is equal to $30 million ($3/0.10).

The simple deposit multiplier is ∆D = (1/rr) × ∆R, where ∆D = change in deposits; ∆R = change in reserves; rr = required reserve ratio. The simple deposit multiplier assumes that banks hold no excess reserves and that the public holds no currency.

Every time a dollar is deposited into a bank account, a bank’s total reserves increases. This is how banks “create” money and increase the money supply. When a bank makes loans out of excess reserves, the money supply increases.

If deposits are given by D, the change in reserves is given by ∆R = v∆D, where v is the reserve requirement. The change in the public’s cash holding is ∆C = c∆D, where c is the cash drain.