MACRO L3 - The Business Cycle

Question 1

what is the business cycle

Answer 1

periodic fluctuations of national output

Question 1

define potential output

Answer 1

the sustainable level of output that could be produced at normal capacity

Question 2

define full capacity output

Answer 2

the maximum level of output that could be produced

Question 3

define output gap

Answer 3

the difference between actual and potential output

Question 4

what does the relationship between actual and potential output mean for the economy

Answer 4

if actual > potential, output gap is positive, economy is operating above normal capacity utilisation

vice versa

Question 5

what are the 4 phases of the hypothetical business cycle

Answer 5

1. upturn
2. expansion
3. peaking out
4. slowdown/recession

Question 6

define upturn

Answer 6

contracting or stagnant economy begins to recover, and growth in actual output resumes, or begins to accelerate

Question 7

define expansion

Answer 7

there is rapid economic growth, the economy is booming; the gap between actual and potential output narrows

Question 8

define peaking out

Answer 8

growth slows down or even ceases

Question 9

define slowdown/recession

Answer 9

little or no growth or even a decline in output;
the economy is operating with a negative output gap

Question 10

define AD

Answer 10

aggregate demand - total spending on goods and services produced in an economy

Question 11

what is the largest expenditure component of AD

Answer 11

Consumer spending

Question 12

what are the fluctuations of aggregate demand relating to the business cycle

Answer 12

• Periods of rapid growth are associated with periods of rapid expansion of AD
• Periods of recession are associated with a decline in AD

Question 13

define aggregate supply

Answer 13

the total amount of output in the economy