Economic cycles Flashcards
Boom
A period where the percentage rate of growth of real GDP is fast and higher than the long term trend
Slowdown
A weakening of the rate of growth, real GDP is still rising but at a slower rate.
Recession
A period of at least 6 months when an economy suffers a fall in aggregate output, employment, investment and business/consumer confidence.
Recovery
A phase after a recession during which real GDP starts to increase and unemployment begins to fall.
Depression
A prolonged downturn in the economy and where a nation’s real GDP falls by at least 10%.
What can cause an economic slowdown
Central banks might raise interest rates to cool down the economy and prevent excessive inflation. High interest rates can slow down consumer spending and business investment.
What can cause an economic recession?
Some are caused by policy changes such as a significant rise in interest rates (contractionary monetary policy) or the impact of higher taxes and cuts in government spending (contractionary fiscal policy). It could also happen after a demand or supply side shock.
Main characteristics of a recession
-Falling real GDP for at least 2 consecutive quarters. Businesses produce and consumers spend less
-Rising cyclical unemployment due to a downturn in the business cycle.
-Disinflation
-Reduces Business inflation due to falling demand
Depression vs recession
Depression is a more prolonged and severe downturn than a recession
Economic scarring
Refers to the medium-long term damage done to economies following a severe economic shock which then leads to a recession
Why does economic scarring happen
-Fall in investment leading to ageing of existing stock
-Rise in long term unemployment and economic activity
-Increase in business faiures
-Shrinkage in the capacity of the financial system to lend
