2.5 Economic Growth

Question 1

What is an output gap?

Answer 1

Difference between the
- actual level of output (real GDP)
and
- the maximum potential level of output

Question 2

What is a positive output gap?

Answer 2

Occurs when
Real GDP > Potential real GDP

Question 3

What is a negative output gap?

Answer 3

Occurs when
Real GDP < Potential real GDP;
Spare capacity in economy to produce more products

Question 4

Why is it difficult to measure output gaps?

Answer 4

Information gaps
- hard to know exactly what maximum productive potential of an economy is

Question 5

Characteristics of boom

Answer 5

Increasing econ growth
Decreasing unemployment
Positive output gap
High confidence
Inflation
Govt budget improves
- Tax rev increase, govt spending decrease

Question 6

Characteristics of recession

Answer 6

Two consecutive quarters of negative econ growth
Increasing unemployment
Negative output gap
Low confidence
Low inflation
Budget deficit
- Increased govt spending; lower tax rev; budget deficit