2.5.3-Trade Cycle Flashcards
What is the Trade cycle?
A period but irregular up and down movements in economic activity
What is a boom?
An often short lived period of rapid growth of real gdp leading to lower unemployment, accelerating inflation, and rising asset prices
Why are booms short lived?
Central banks usually respond by raising interest rates
What does a boom result in?
A positive output gap
What are the impacts of an economic boom?
-increased output leads to more jobs being available
-surge in asset prices
-environmental consequences
-increased consumption
-higher business investment with positive accelerator effect
-increased tax revenues
-inflation
What is a slowdown?
A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate
What is recovery?
A phase after a recession, during which real GDP starts to increase and unemployment starts to fall
What is a depression?
A prolonged downturn in the economy and where a nation’s real GDP falls by at least 10 percent
What is a recession?
Negative economic growth over two consecutive quarters
What are the impacts of a recession?
-falling real GDP
-rising unemployment
-disinflation
-reduced business investment
-fall in animal spirits
-rising fiscal deficit in government
What are recessions caused by?
Policy changes (like a rise in interest rates or higher taxes) or demand or supply side shocks
What is economic scarring/ hysteresis?
The economy may never recover from a deep recession due to a permanent loss of labour and a loss in physical capital
Why could there be a permanent loss of labour due to a recession?
People may take early retirement, lose their skills, or become discouraged
Why could there be a loss of physical capital due to a recession?
If firms dont make up the investment which they cut back on during the recession
