1.4 Short Run Macroeconomic Equilibrium

Question 1

What is short run equilibrium?

Answer 1

When aggregate demand equals aggregate supply

Question 2

What is a positive output gap (inflationary gap) ?

Answer 2

When short run equilibrium is such that the real GDP is above the full employment level of output

Question 3

What is a negative output gap (deflationary gap) ?

Answer 3

When short run equilibrium is such that the real GDP is below the full employment level of output

Question 4

What is a business cycle/economic cycle?

Answer 4

The natural variation in economic activity (real GDP) over time. A full economic cycle includes a natural upswing and downswing in actual output, often characterised by recession, recovery, boom and slowdown phases

Question 5

What is a recession?

Answer 5

Falling real GDP, usually accompanied by rising unemployment. In the UK, a recession is two consecutive quarters of falling GDP

Question 6

What is a recovery?

Answer 6

When the economy still has a negative output gap but real GDP is rising and unemployment may be starting to decrease

Question 7

What is a boom?

Answer 7

When real GDP is increasing faster than the trend rate of growth and there is a positive output gap. Unemployment could fall below the natural rate of unemployment and there tends to be inflation

Question 8

What is a slowdown?

Answer 8

When there is still a positive output gap but it is shrinking as the growth rate of real GDP starts to fall