Class 12: "Fear the Boom and Bust"

1. Draw a graph of the business cycle over time, labeling the phases, expansion, peak, recession, and trough.

2. Explain the Keynesian concept of a cyclically balanced budget (as opposed to a budget balanced at every point in time).

3. Economists note that there may be a "self-fulfilling prophesy" when it comes to our expectations of the macroeconomythat is if households and firms believe things will go well/bad, then things will go that way. In the context of what Keynes called "animal spirits," explain why.

4. Outline Friedrich Hayek's view of the causes of the "boom and bust" cycle (i.e. the business cycle).