3.1 The Economic Cycle Flashcards
Economic cycle definition
The repeated pattern of fluctuations in the short run economic growth and how it differs from the trend growth of an economy
Boom definition
Period of above average short run economic growth
Downturn definition
Period where short run economic growth falls from above average to below average
Recession definition
Two successive quarters of a year where short run economic growth is negative
Recovery definition
When short run economic growth starts to increase after a recession
Characteristics of a boom
- high economic growth
- positive output gap
- near full employment
- demand-pull inflation
- high rates of investment, business confidence
- balance budget improves due to higher taxes revenues and less spending on welfare payments
Characteristics of a recession
- negative economic growth
- negative output gap
- spare capacity
- demand-deficit unemployment
- low inflation rates
- balance budget worsens, less tax revenue and more spending of welfare payments
- less investment
Output gap definition
Difference between actual growth and trend growth
Positive output gap definition
Actual growth is higher than trend growth
Why might there be a positive output gap?
- labour works overtime
- high productivity
Negative output gap definition
Actual growth is below trend growth
What does negative output gap’s produce?
Unemployment as there is spare capacity
What does positive output gaps produce?
Increases in the price level due to excessive demand for goods and services than the productive capacity of the economy
Why does the economic cycle occur, what factors can be linked to it?
- multiplier-accelerator model
- asset price bubbles
- animal spirits
- herding
- economic shocks
What is the multiplier-accelerator model?
And explanation of the trade cycle where the multiplier and accelerator combine to magnify cyclical fluctuations in economic growth
How does asset price bubbles affect the economic cycle?
Asset price bubbles lead to the wealth effect = more consumption. If these bubbles ‘burst’ falling prices lead to a strong downward wealth effect = further reduction in consumption = magnifying a downturn
What are animal spirits?
The collective feeling of consumers and businesses confidence which can affect economic decisions such as those affecting consumption and investment
(Keynes theory)
How do animal spirits effect the economic cycle?
If confidence is low within businesses and consumers, then even with e.g low interest rates the economy may remain in recession phase as it is ‘expected’ to be there
What is herding?
Consumer and investor behaviour often moves in similar directions at the same time, where people imitate other people’s behaviour
How does herding have an effect on the economic cycle?
People copy other people’s behaviour in both consumption and investment e.g. in shares or investing in properties. These have a large influence of the level of spending in an economy as large numbers (herds) of people get involved = influence boom or recovery in an economy
