Business Cycle

Question 1

What is the difference btw decrease in GDP & a decrease in GDP growth?

Answer 1

decrease in GDP = fall of output produced

decrease in GDP growth = falling rates of growth (though the rates may be positive)

Question 2

Formula for % change in GDP (or anything)?

Answer 2

((final value real GDP - initial value GDP) / initial value GDP) X 100

Question 3

Draw the business cycle

Answer 3

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REMEMBER:
origin needs a O
Y axis = Real GDP
x axis = time (years)
potential GDP trend

Question 4

What is a contraction?

Answer 4

follows peak

falling real GDP (negative growth)

6 months/ 2 quarters = recession

increased unemployment

fall in prices

Question 5

What is a trough?

Answer 5

cycle’s minimum level of GDP

end of contraction

widespread unemployment

actual GDP < potential GDP;
unemployment > natural rate of unemployment

Question 6

What is a peak?

Answer 6

cycle’s maximum real GDP

employment increases

general price level may increase rapidly

likely to experience inflation

actual GDP > potential GDP;
unemployment < natural rate of unemployment

Question 7

What is expansion?

Answer 7

positive growth in real GDP

employment increases

general price level rises

Question 8

What does output gap mean?

Answer 8

actual GDP lies above or below potential GDP

Question 9

How does the business cycle relate to the macroeconomic objectives (draw graphs)?

Answer 9

to reduce intensity of expansions and contractions - decrease output gaps

therefore, lessening problems of rising price levels & unemployment (2 curvy lines graph wt arrows)

increase steepness of potential GDP by achieving rapid economic growth over long periods of time
(straight lines graph)