lesson 11- the traditional business cycle Flashcards
draw and label a business cycle
y axis = real output
x axis = time
estimated long term growth
negative and positive output gaps
similar shape to sin graph
peak/boom
downturn
recession/slump/trough
recovery/expansion
what is the peak/boom
national income is high, so consumption and investment spending will be high
tax revenue will be high
wages will be rising and profits increasing
imports high
what is the downturn
output and income fall
consumption and investment decrease
tax revenues begin to fall and government spending on benefits rises
unemployment rises
imports decline
what is the recession /slump/ trough
high unemployment
consumption, investment and imports are low
what is hysteresis
the trend rate of an economies growth can shift downwards if there is a deep recession because of permanent loss of human and physical capital
what are the causes of long run economic growth
Land-natural resources
Labour- change in quality or quantity of workforce, age, unemployment, immigration
Capital- as capital stock increases, causes growth
Technological processes-decreases average unit cost, increase supply
Efficiency- the way factors of production are used together
what are the causes of the economic cycle
demand side shocks-e.g. housing bubble bursts, stock market crash, interest rate increases
Supply side shocks-e.g. rise in commodity prices, wage increases
what is a output gap
difference between actual GDP and the estimated long term growth (trend rate)
draw a negative and positive output gap on a AD, SRAS and LRAS diagram
AD decreases or increases
output gap is the difference between output and the output at LRAS
what is a automatic stabiliser
expenditures that automatically rise in a recession and fall in a boom
-in recession government benefits increase so AD falls less than it would of
- in boom government spending decreases as multiplier effect isnt needed, so AD increases by less
