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Macroeconomics > Economic Growth and the Economic Cycle > Flashcards

Economic Growth and the Economic Cycle Flashcards

1
Q

What is short run growth?

A

The percentage increase in a country’s real GDP, usually measured annually.

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2
Q

What causes short run growth?

A

An increase in aggregate demand

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3
Q

What is long run economic growth?

A

Where the productive capacity of the economy is increasing, referring to the trend rate of growth of real national output in an economy over time.

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4
Q

What causes long run economic growth?

A

An increase in aggregate supply

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5
Q

What is the potential output of an economy?

A

What the economy could produce if resources were fully employed

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6
Q

When does an output gap occur?

A

Where there is a difference between the actual level of output and the potential level of output

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7
Q

How are output gaps measured?

A

As a percentage of national income

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8
Q

What is a negative output gap?

A

Where the actual level of output is less than the potential level of output

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9
Q

What are the effects of a negative output gap?

A

A downwards pressure on inflation, meaning the economy’s resources are not being used to their full productive potential, i.e there is still spare capacity in the economy

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10
Q

What is a positive output gap?

A

When the actual level of output is greater than the potential level

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11
Q

Why does a positive output gap occur?

A

Resources are being used beyond their normal capacity, e.g if labour works overtime

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12
Q

What are the effects of a positive output gap?

A

Upwards pressure on inflation and high rates of economic growth

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13
Q

What is the business cycle?

A

The stage of economic growth that an economy is in. It consists of periods of booms and busts.

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14
Q

When is there a recovery stage?

A

When there are periods of economic growth so real output increases

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15
Q

When is there an economic boom?

A

When there are fast rates of economic growth, usually inflationary or unsustainable

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16
Q

When is there a recession?

A

When the real output in the economy falls so there is negative economic growth

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17
Q

What can governments do during a recession?

A

Increase spending to try and stimulate the economy. This could be through increasing spending on welfare payments or cutting taxes

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18
Q

What happens during periods of economic growth?

A

Governments will receive more tax revenue as consumers are spending and earning more. Furthermore, the government will not need to spend as much as the economy does not need stimulating

19
Q

What are the characteristics of a boom?

A

High rates of economic growth
Near full capacity or positive output gaps
(Near) full employment
Demand-pull inflation
High levels of confidence, leading to increased inflation
Improved government budgets

20
Q

What is demand-pull inflation?

A

A period of inflation which occurs when economic growth is too fast

21
Q

What is a recession?

A

2 consecutive quarters of negative economic growth

22
Q

What are the characteristics of a recession?

A
  • Negative economic growth
  • Negative output gaps/lots of spare capacity
  • Demand-deficient unemployment
  • Low inflation rates
  • Worsened government budgets with higher spending on welfare payments
  • Less confidence amongst consumers and firms
23
Q

What is the cost of economic growth for consumers?

A
  • It does not benefit everyone equally, for example those on low incomes will feel worse off when there is high inflation and therefore inequality will increase
  • There will be higher demand-pull inflation due to the higher levels of consumer spending
  • Consumers could face more shoe leather costs
  • The benefits of higher consumption may not last long term due to the law of diminishing returns
24
Q

What is the law of diminishing returns?

A

The utility that consumers derive from consuming a good diminishes as more of the good is consumed

25
Q

What is the benefit of economic growth for consumers?

A
  • The average consumer income increases as more people are in employment
  • Consumers feel more confident in the economy, increasing consumption and leading to higher living standards
26
Q

What are shoe leather costs?

A

Having to spend more time and effort finding the best deal as prices rise

27
Q

What is the cost of economic growth for firms?

A

They may face more menu costs as a result of rising inflation

28
Q

What are menu costs?

A

The cost that a firm will endure due to changing its prices

29
Q

What are the benefits of economic growth for firms?

A
  • They may make more profit, increasing investment. Better technology could lead to increased production and lower costs in the long run
  • As they grow they can take advantage of the benefits of economies of scale
  • If there is growth in export markets the firms will face more competition, making them more productive and efficient. Also, it will give them more sales opportunities
30
Q

What are the costs of economic growth for the government?

A

The government may have to increase their spending on healthcare if the consumption of demerit goods increase

31
Q

What are the benefits of economic growth for the government?

A

The government budget will improve since more people will be paying tax and fewer people will require welfare payments

32
Q

What are the costs of economic growth for living standards?

A

High levels of economic growth could damage the environment in the long run due to an increase in negative externalities from the consumption of some goods and services

33
Q

What are the benefits of economic growth for living standards?

A
  • As consumer incomes increase people are more able to show concern for the environment
  • Economic growth may lead to the development of technology that allows the production of goods and services in greener ways
  • Higher average wages result in consumers enjoying goods and services of a higher quality
  • Public services can be improved, increasing life expectancy + education levels
34
Q

What are the causes of cyclical instability?

A
  • The sustainability of economic growth
  • Excessive growth in credit and levels of debt
  • Asset price bubbles
  • Destabilising speculation and animal spirits
35
Q

How can the sustainability of economic growth affect cyclical instability?

A
  • Growth is sustainable when the rate of economic growth can be maintained in the
    long run.
  • Fast economic growth today could mean that natural resources are
    depleted, causing environmental problems for future generations and reducing the potential rate of growth
36
Q

When does unsustainable growth occur?

A

During the boom and bust sections of the business cycle (deviations from the trend rate of growth)

37
Q

How can excessive growth in credit and levels of debt affect cyclical instability?

A

Growth financed by public debt does not contribute to higher productivity and is unsustainable, making it hard to pay back in the future. By being more productive, economic growth is more sustainable as it also increases the economy’s productive capacity and therefore there is more room for the economy to grow.

38
Q

How can asset price bubbles affect cyclical instability?

A

When a market price bubble occurs the asset is traded more, causing demand to exceed supply and the price to rise above its intrinsic value. The bubble will then burst, causing the price to suddenly drop to its ordinary level and a loss of confidence in the asset.

39
Q

When does an asset price bubble occur?

A

When the price of an asset is predicted to rise significantly.

40
Q

What are animal spirits?

A

Instincts and emotions of human behaviour, driving the level of confidence in an economy.

41
Q

What is destabilising speculation?

A

Speculations that lead to changes in the price level in a market. For example, speculators purchase assets that they believe will rise in price. This can cause shifts in the actual price of assets in an economy.

42
Q

How can destabilising speculation and animal spirits cause cyclical instability?

A

Expectations about the economy have major impacts on rates of investment and economic performance as a whole.

43
Q
A

Macroeconomics (7 decks)

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