Economic Growth and Cycle Flashcards
What are the 4 phases of economic cycle?
- boom/expansion
- slowdown
- recession
- recovery
what is a boom/expansion?
when the level of real output becomes greater than the trend level of output. ends when upswing of economic cycle gives way to next downswing
what is slowdown?
occurs when rate of growth decelerates but national output is still rising
what is recession?
when real national output is falling for 6 months or more. a severe recession lasting 2 years or more is called a depression
what is recovery?
occurs when real GDP begins to grow after the end of a recession, or at the end of the trough of the economy cycle
what does economic boom mean overall? lcr
-fast growth of consumption
-due to rising real incomes, strong confidence, surge
in house prices
-pick up in demand for capital goods due to investing in extra capacity
-more jobs created, falling unemployment, higher real wages
-high demand for imports therefore run a larger trade deficit
-government tax revenues will rise
-increase in inflationary pressures (demand might outstretch supply) if economy overheats and has a positive output gap
what does economic recovery mean overall? lcr
- rising aggregate demand leads to increase in real national output and fall in amount of spare capacity
- rise in government borrowing
what does economic recession mean overall? lcr
- falling demand
- rising unemployment
- some firms go out of business
- low confidence in the economy and most firms will reduce investment
possible causes of a recession:
- external events
- tightening of macro policy
- fall in asset prices or supply of credit
- drop in business and consumer confidence
short term economic effects of a recession:
- business profits and capital investment
- unemployment
- government finances
- deflation
long term economic and social effects of a recession:
economic:
- rising structural long-term unemployment and regional decline
- low rates of investment can reduce the size of the capital stock
- persistent budget (fiscal) deficits and a rising national debt leads to austerity
social:
- falling real wages
- widening inequality of income and wealth leading to rising poverty
- social costs like loss of social cohesion and threats to democracy
causes of economic cycle:
- fluctuations in aggregate demand
- supply-side factors i.e. changes in technology
- speculative bubbles i.e. rapid economic growth leads to a rapid rise and speculative bubble in asset prices
- political business cycle theory i.e. party may buy votes
- outside shocks: demand and/or supply side shocks
- climatic cycles
- multiplier/accelerator interaction
what is short-run economic growth?
the actual annual percentage change in real national output
causes of short-run economic growth:
- changes in aggregate demand
- changes in short-run aggregate supply
- short-term policy changes
- short-term demand and supply side shocks
what are the impacts of shocks on economic growth:
- demand-side shocks refer to unexpected changes in the economy that directly impact on aggregate demand
- supply-side shocks refer to unexpected changes in the economy that directly impact on aggregate supply