Business Cycle

Question 1

Output gaps for classical

Answer 1

Short run-can have positive/negative output gaps (overtime/inefficient use of resources)

Long run-No gaps as always operate at long run (positive becomes unsustainable, and negative improves)

Question 2

Output gaps for keynesian

Answer 2

Only negative outputs possible because of spare capacity and bottleneck.

Or no output gap at all. (cannot go beyond Yfe, will only lead to inflation)

Question 3

5 Characteristics of a boom and recession

Answer 3

High animal spirits (consumption/inv/AD increases)
High economic growth
Demand pull inflation
Low unemployment (derived demand for labour)
Improved budget (less benefits, more income tax revenue)

Vice versa for recession