3.1 Economic growth and cycle Flashcards

1
Q

What is the economic cycle?

A

fluctuation of GDP around its long term growth trend

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2
Q

What two ways do fluctuations in the economy occur?

A

seasonal and cyclical fluctuations

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3
Q

What are seasonal fluctuations?

A

variation of economic activity resulting from seasonal changes in the economy
(weather)

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4
Q

What are cyclical fluctuations?

A
  • upswing and downside in aggreagte economic activity taking place over 4 - 12 years.
  • caused by supply and demand side shocks
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5
Q

What is short term economic growth?

A

measured in real GDP over a 12 month period and varies in differant phases of the economic cycle

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6
Q

What is long term economic growth?

A

refers to the expansion of the long term productive capacity of the economy

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7
Q

What is actual output?

A

level of real output produced in the economy

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8
Q

What is trend growth rate?

A

annual average percentage increase in the productive capacity of the economy

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9
Q

When does an output gap happen?

A

actual output differs from the trend level of output

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10
Q

When is there a positive output gap?

A

actual real output > trend level output

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11
Q

What are the four phases of the economic cycle?

A
  • boom / expansion ( positive output gap)
  • slowdown ( rate fo growth decelerates)
  • recession ( real national output falling for 6 months or more )
  • recovery ( real GDp begins to grow )
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12
Q

Explain the economic boom?

A
  • fast growth of consumption: rising real incomes, strong confidence and rise in house and share prices
  • higher demand for capital goods as businesses invest in capital goods
  • more jobs, falling unemployment
  • high demand for imports
  • government tax revenues rising
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13
Q

Explain the economic recovery?

A

less spare capacity and rising AD leading to increase in real national output and fall in amount of spare capacity

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14
Q

What is a recession?

A

a fall ion real GDP for two consecutive quaters

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15
Q

Characteristics of a recession?

A
  • falling demand
  • rising unemployment
  • some firms go out of business
  • low confidence in economy
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16
Q

What is the differance between a recession and depression?

A
  • depression is a prolonged slump where real GDP falls by more than 10% from peak to trough
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17
Q

What are the possible causes of a recession?

A
  • external events
  • tightening of macro policy
  • fall in asset prices or supply of credit
  • drop in business and consumer confidence
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18
Q

How can external events cause a recession

A
  • sharp rise in global commodity proces (oil and gas)

- causes COP to increase and SRAS to decrease

19
Q

How can the tightening of macropolicy cause a recession?

A
  • higher interest rates cause loans to be more expensive

- rise in tax or cut in gov spending

20
Q

How can a fall in asset prices or supply of credit cause a recession?

A
  • steep decline in the level of share or house prices

- collapse in supply of credit

21
Q

How can a drop in business confidence cause a recession?

A
  • lower investment could lead to job losses

- less spending and more saving

22
Q

What are four short term economic effects of a recession?

A
  • business profits and capital investment
  • unemployment
  • government finances
  • deflation
23
Q

What are some long term economic effects of a recession?

A
  • rising structural long term unemployment and regional decline
  • low interest rates of investment can reduce the size of capital stock
  • persistant budget deficits
24
Q

What are some long term social effects of a recession?

A
  • falling real wages hits average living standards and reduces demand
  • widening inequality of income and wealth leading to rising poverty
  • social costs such as loss of social cohesion
25
Q

What are some alternative indicators if economic cycle?

A
  • rate of inflation
  • investment
  • unemployment
26
Q

What is the output gap?

A

actual GDP is greater than the estimated potential GDP

27
Q

WHat is positive output gap?

A

actual GDp is greater than the estimated potential GDP

28
Q

WHat is the main problem with a positive output gap?

A

rising demand- pull and cost push inflationary pressures

29
Q

What is a negative output gap?

A

when the level of actaul GDP is less than potential GDP

30
Q

What is the main problem with a negative utput gap?

A

likely to be higher unemployment and possible deflation risk

31
Q

What are some problems with measuring the output gap?

A
  • innacurate data on labour force ( difficulty measuring scale)
  • problems with accuracy of measuring productivity (cannot directly observe)
  • surveys of producers may be innacurate
  • gaps in knowledge about how businesses are investing
32
Q

What is short run economic growth?

A

the actual annual percentage change in real national output

33
Q

What are the four auses of short run economic growth?

A
  • changes in AD
  • changes in SRAS
  • changes in short term policy
  • short term demand and supply side shocks
34
Q

What are the six factors that causes economic growth?

A
  • interest rates set by central bank
  • fiscal policy
  • commodity prices (oil and gas)
  • exchange rates
  • trading conditions in other countries
  • confidence of businesses and households
35
Q

When does long run economic growth occr?

A

when there is an increase in potential productive capacity of the economy

36
Q

WHat must there be for long run economic growth to occur?

A

increase in LRAS

37
Q

What 5 things can cause an increase in long run economic growth?

A
  • potential output
  • productivity of labour and capital
  • technological progress and strength of enterprise
  • changes in labour force
  • investment rates
38
Q

What are demand side shocks?

A
  • refer to unexpected changes in the economy that directly impact aggregate demand
39
Q

what are supply side shocks?

A
  • unexpected changes in the economy that directly impact aggregate supply
40
Q

What are the four benefits of economic growth?

A
  • higher living standards (real GNI per capita, helps to lift people out of poverty)
  • employment effects (stimulates jobs and contributes to lower unemployment)
  • fiscal dividend ( raise tax revenues and reduce gov spending on unemployment)
  • accelerator effect (stimulates new investment)
41
Q

What ar the three perspectives on economic growth?

A
  • balanced growth (sector balance)
  • sustainable growth (meets demand of current generations)
  • inclusive growth (benefits are widely spread)
42
Q

What can high rates of gdp growth bring about?

A

undesireable economic and social costs

43
Q

What are the problems with high GDP rates?

A
  • risk of higher inflation and higher interest rates
  • environmental effects
  • inequalities of income and wealth