Economic Cycle 4.2.3

Question 1

What is the economic cycle?

Answer 1

The pattern of economic growth that economies typically follow (boom~>recession~>depression~>recover)

Question 2

What metrics does the economic cycle use to measure changes in the economy’s size?

Answer 2

Real GDP & time

Question 3

Describe a textbook economic cycle

Answer 3

real GDP travels up & down the graph as time continues, peaking at the same height every boom and hitting the same bottom level at the depression. The graph is wave shaped

Question 4

Describe a more realistic economic cycle

Answer 4

A similar wave shape is used but this time, each peak GDP is higher than the previous one, which is also the case for the lowest point in each cycle.

Question 5

When does a positive output gap/ inflationary gap happen?

Answer 5

Whenever growth is above trend growth. During this period, inflation is likely to be higher

Question 6

When does a negative output gap/ deflationary gap happen?

Answer 6

Whenever growth is below trend growth. DOES NOT mean deflation, but lower inflation

Question 7

What is trend growth?

Answer 7

The average rate of growth that the economy experiences over a period of time

Question 8

Should the economic cycle stay near trend growth?

Answer 8

Trend growth should stay as close to trend growth as possible as bigger booms mean bigger depressions/ recessions. This would mean an unstable economy