5) The Economic/ Business Cycle

Question 0

What does solid line represent

Answer 0

⚫️Actual GDP

➡️which fluctuates over time

Question 1

What does the dotted line represent

Answer 1

⚫️trend rate

➡️of growth over time

Question 2

What happens when the real GDP is growing faster than the trend

Answer 2

economy has a positive output gap

Question 3

What happens when the real GDP is below its trend

Answer 3

economy has a negative output gap

Question 4

What are the four stages of the economic/business cycle

Answer 4

1⃣Boom

2⃣Recession

3⃣Slump

4⃣recovery

Question 5

Describe the boom stage in the business cycle

Answer 5

⚫️period of rapid economic growth
➡️business cycle at its peak

⚫️economy
➡️working beyond full employment

⚫️large positive output gap
➡️economy growing above trend rate of growth

⚫️position is not sustainable in the long run
➡️economy may overheat
➡️causing inflation

Question 6

Describe the recession stage in the business cycle

Answer 6

⚫️2 quarters or more failing output

⚫️output and income falls
➡️leading to fall in consumption and investment

⚫️unemployment rise

⚫️tax revenues fall

⚫️government spending more on benefits

Question 7

Describe the slump stage in the business cycle

Answer 7

⚫️lowest point on the business cycle

⚫️unemployment is peak

⚫️GDP stop falling
➡️but no growth

⚫️economic activity low
➡️due to low business and consumer confidence

Question 8

Describe the recovery stage of the business cycle

Answer 8

⚫️economic activity will rise slowly
➡️due to rising consumer and business confidence

⚫️real GDP will rise

⚫️unemployment will fall