8.1 Economic growth and the economic cycle

Question 1

What is short-run economic growth?

Answer 1

The actual annual percentage change in real national output

Question 2

What is long-run economic growth?

Answer 2

An increase in the potential productive capacity of the economy

Question 3

How is short-run economic growth measured?

Answer 3

The annual percentage change in Real National Output

Or

Gross Domestic Product (GDP)

Question 4

How is long-run economic growth measured?

Answer 4

The maximum potential output of the economy using all factor resources as illustrated on the Production Possibility Frontier.

Question 5

In the short-run what is the primary cause of economic growth?

Answer 5

An increase in the components of AD

AD = C + I + G + (X-M)

Question 6

In the long-run what is the primary cause of economic growth?

Answer 6

An increase in the productive capacity of the economy. This is a change in any of the factors of production (land, labour, capital, enterprise).

Question 7

How is short-run economic growth demonstrated?

Answer 7

Using a SRAS-AD diagram

Question 8

How is long-run economic growth demonstarted?

Answer 8

PPF/PPC’s

or

the classical model

Question 9

What’s the definition of the economic cycle?

Answer 9

Variations in the level of productive capacity of an economy over time

Question 10

What is the definition of gross domestic product (GDP)?

Answer 10

The value of goods and services produced in the economy over a period of time

Question 11

What factors can cause a boom in the economic cycle? (7)

Answer 11

High rate of economic growth

High demand

Low unemployment

Inflationary pressure

Labour skills shortages

High confidence in the economy

Capital Investment is high

Question 12

What factors can cause a recession in the economic cycle? (5)

Answer 12

Demand falls

Unemployment begins to rise

Some firms will go out of business

Confidence in the economy is low and most firms will

reduce investment

Question 13

What is a boom on the economic cycle?

Answer 13

A boom is a period of high levels of economic activity.

Question 14

What is a recession on the economic cycle?

Answer 14

The rate of economic growth starts to fall in a downturn

If real GDP falls for 6 months then this is known as a recession

Question 15

What is a slump on the economic cycle?

Answer 15

The bottom of the business cycle which represents a period of serious economic decline

Question 16

What factors can cause a slump on the economic cycle? (5)

Answer 16

Low or negative growth

Demand and inflation are low

Unemployment is high

Confidence in the economy is low

High rate of bankruptcy

Question 17

What is a recovery on the economic cycle?

Answer 17

When there are signs that economic growth is starting to rise, often referred to as the ‘green shoots of recovery’

Question 18

What factors characterise a recovery on the economic cycle? (6)

Answer 18

Economic growth starts to rise

Demand increases

Unemployment falls

Inflation starts to rise

Confidence in the economy increases

Capital Investment increases

Question 19

What is the output gap? (positive or negative)

Answer 19

The difference between actual and potential GDP

Question 20

What is a demand side shock?

Answer 20

This refers to unexpected changes in the economy that directly impact on aggregate demand

Question 21

What is supply side shock?

Answer 21

This refers to unexpected changes in the economy that directly impact on aggregate supply

This will often refer to the size and productivity of the workforce and firms’ ability to produce goods and services