Macroeconomics- The Economic Cycle And Growth

Question 1

What is the economic cycle?

Answer 1

A period between 2 points where the economy is on trend and includes a period when the economy is above and below trend

Question 2

What are the 4 stages of the economic cycle?

Answer 2

Boom/peak- output is at its maximum point above trend in the cycle

Downturn- output is decreasing from boom to recession

Slump/recession- output is at its minimum point below trend in the cycle

Upturn/recovery- output is increasing from recession towards boom

Question 3

What are the output gaps?

Answer 3

Output gap- The difference between the actual output and the trend growth level of output

Positive output gap- The actual level of GDP is above the trend line

Negative output gap- The actual level of GDP is below the trend line

Question 4

What is short and long run growth?

Answer 4

SR- Growth that makes use of spare capacity in the economy
Determined by an increase in aggregate demand

LR- An increase in productive capacity in an economy
Determined by an increase in the quantity/quality of factors of production

Question 5

What is hysteresis?

Answer 5

When factors of production lost in recession don’t return after an economic recovery

Question 6

What causes the economic cycle to fluctuate?

Answer 6

Demand side shocks and supply side shocks
They can be global or domestic