2.5.2, 2.5.3 the business cycle, output gaps

Question 1

draw the business cycle

Answer 1

• boom
• slowdown/ slump
• bust (recession)
• recovery

Question 2

define a recession

Answer 2

two or more consecutive quarters of negative economic growth

Question 3

what happens in a recession?

Answer 3

• low animal sprits
• high unemployment
• negative economic growth
  *low price level (deflation/disinflation)
• increased government budget deficit

Question 4

what is a boom

Answer 4

part of the business cycle where real GDP is at it’s highest

Question 5

what is a slump?

Answer 5

part of the business cycles where real GDP is decreasing

Question 6

what is a recovery?

Answer 6

the part of a business cycle where real GDP is increasing

Question 7

why is there a increase in the trend (average) GDP ?

Answer 7

increase in technological potential

Question 8

what is the potential trend GDP?

in reference to actual GDP

Answer 8

actual show the flucations of real GDP around this trend

average GDP

Question 9

what is an ouput gap?

Answer 9

the difference between the actual GDP and potential trend GDP
* negative ouput gap : resources not fully employed
* positive out put gap: over using resources (overworking hours ) this becomes unsustainable

Question 10

show the positive and negative ouput gaps of the business cycle on a diagram

Answer 10

Question 11

define potential trend GDP

Answer 11

the sustainable rate of GDP growth caused by improvements in productive capacity overtime

Question 12

define negative output gap and positive gap

Answer 12

• negative: when actual GDP is below potnetial trend GDP
• postitive: when actual GDP is above potential trend GDP

Question 13

show negative output gap on a necolassical AS AD diagram

Answer 13

Y1 is below Ye
* ye shows the long run potential GDP

Question 14

what does the neoclassical model about out put gaps?

Answer 14

• in the short run: output gaps are possible
• in the long run: no ouput gaps are possible as it is believed all resoucres will be used efficently and we will be at LRAS

positive are only short run and are unsustainable

Question 15

how can ouput gaps be shown on the keynesian LRAS ?

Answer 15

no ouput gap at full empoyment
* NO POSITIVE OUPUT GAP POSSIBLE
* can have a long run negative output gap
*

no SRAS

Question 16

what are the 5 characteristics of a boom?

Answer 16

1. high animal spirits ( AD increases)
2. high economic growth
3. demand pull inflation
4. low unemployment derived demand for labour will increase
5. improved goverment budget (less spending on goverment spendings and more in income tax), reduction in budget deficit

Question 17

what are the 5 characteritsics of a recession?

Answer 17

1. low animal spirits (less investment and consumption)
2. negative economic growth (AD decreases)
3. low inflation/ deflation
4. high unemployment, less derived demand for labour
5. increase in goverment budget deficit ( more spending on benefits tahn getting in tax revuene )