2.2.4 - Government expenditure (G)

Question 1

Blurt everything you know about the trade cycle

Answer 1

Trend growth rate - The straight diagonal line is called the trend growth rate and is the predicated rate of GDP. However, due to unforeseen events such as supply side shocks happening regularly, the reality is that the actual growth rate differs quite a lot from the trend growth. Although this is the case, the overall trend of actual growth and trend growth is the same. Instead of a straight diagonal line, the actual growth contains a number of peaks and troughs.

**Positive output gap **- When the actual GDP rate is higher than the predicated GDP rate,

Negative output gap - when the actual GDP rate is lower than the predicated GDP rate,

Boom - A peak in the economic cycle. This is a period of high levels of output within the economy. The characteristics of a boom often include high levels of productivity, increased business sales/demand for goods/services, increasing wages and a relatively high inflation rate.

Recession - a significant decline in economic activity over two (6 months) of more consecutive quarters. In this stage of the economic cycle, high levels of unemployment, low consumer and business confidence, and a reduction in Aggregate demand are all likely to occur.

Recovery - Once the rate of GDP starts to increase again, the economy goes into the recovery phase. This can often be characterised by low levels of economic growth, a reduction in unemployment and increasing consumer and business confidence.

Question 2

Fiscal Policy

Answer 2