Ch26 Economics Growth Flashcards
Reasons for GDP fluctuations?
Demand-side shocks and supply-side shocks
4 stages of business cycle?
Boom (peak)
Downturn
Recession
Recovery (expansion)
What are demand-side shocks? (Example too)
Shocks that affect AD
Eg. World recession could lead to uk exports to lose demand
What are supply-side shocks? (Example too)
Shocks that affect AS
Eg. World commodity prices go up, lead to price level in uk to go up, therefore less spending therefore recession
Define output gap?
The difference between the actual level of GDP and the productive potential of the economy.
What goes on the axis of a PPF graph for a whole economy?
?
Define boom?
Period of time when the economy is growing strongly and is operating around it’s productive potential.
Define business cycle? (Or economics cycle or trade cycle)
Regular fluctuations in the level of economic activity around the productive potential of an economy.
Define economic growth?
Growth in the productive potential of the economy. Measured by GDP.
Define economic recovery?
The movement back from where the economy is operating below it’s productive potential to a point where it is at it’s productive potential.
5 causes for long term economic growth?
Land - country finds oil Labour - larger population Capital - investment into machines Technological progress Efficiency
3 things to consider when looking at GDP?
Real not nominal GDP
GDP per capita
Falling GDP growth rate doesn’t mean economy is in recession or slowing (10% growth to 8%growth, still growth!)
How would you draw a diagram to show an output gap?
Price level - y-axis Real output - x-axis AS and AD curves (long run) 2 price levels, one going to vertical AS to show potential output, one to AD meets AS to show actual output Gap between Y1 and Y2 is output gap
When is a positive output ago present?
When an economy is growing faster than the trend. This creates pressured such as shortages of raw materials and tight labour markets. Sign that economy may be overheating, thus causing inflationary pressures.
How would the Bank of England go about lowering inflationary pressures during a time with a positive output gap and why?
They may raise interest rates. This would reduce spending because the cost of borrowing money would be higher, therefore people would borrow and spend less. This would reduce inflationary pressures because demand pull inflation would reduce due to less demand for goods as services. A fall in demand causes a fall in prices.
