Business Cycle Model

Question 1

Define full capacity output

Answer 1

Maximum level of output economy can achieve in given period whilst using full capacity in all inputs

Question 2

Define trend output

Answer 2

The level of output the economy can achieve using inputs at a normal capacity

Question 3

Define economic boom

Answer 3

A period of rapid economic growth where differences between actual output and trend output are small

Question 4

Define economic recession

Answer 4

Period of slow/negative economic growth in which actual output begins to diverge from potential output

Question 5

Define consumption function

Answer 5

Shows the aggregate level of desired spending at each level of aggregate income
C=C+c(Y)

Question 6

Define autonomous consumption

Answer 6

A minimum of subsistence. Level of desired consumption if income was 0 (necessities)

Question 7

Define savings

Answer 7

Part of income not dedicated to consumption (y-c)

Question 8

Define equilibrium output

Answer 8

The point where output income equals desired spending

Question 9

Define the multiplier

Answer 9

The ratio of a change of equilibrium output to a change in autonomous consumption that caused the initial change in output (1/1-c)

At equilibrium Y=AD=(1/1-c)(C(0)+I)