2.5.3 Trade (business) cycle

Question 1

Business cycle

Answer 1

Illustrates the fluctuations in real GDP.
-> During the boom phase
-> In the slowdown, signs of over-heating emerge leading to a rise in inflation and interest rates.
-> A recession occurs when real output contracts, economic activity declines

Question 2

Boom

Answer 2

A period of rapid growth of GDP
-> Positive output gap - Real GDP is expanding faster that estimated potential.

Question 3

Characteristics of a boom

Answer 3

->Rising demand pull (or) cost push inflation - excess demand
- >Low unemployment - due to a fall in cyclical unemployment.
->Increase trade-deficit - surge in import demand, as wages rise.

Question 4

Recession

Answer 4

Two consecutive quarters of negative economic growth
-> Negative output gap - Real GDP is lower than estimated potential.

Question 5

Characteristics of a recession

Answer 5

-Falling inflation - due to a fall in consumer expenditure.
-Rising unemployment - due to less demand for workers caused by falling real output.
-Increase budget deficit - due to a rise in government sending, and a fall in tax revenues.