Output gaps and the trade cycle Flashcards
What is an output gap
the difference between the actual level of GDP and its potential level
When is an output gap negative
When the actual output is less than the potential output
What corresponds with a negative output gap
higher unemployment, under-utilised resources and falling prices
What is potential output
the level of production an economy can achieve when all resources are fully employed without causing prices to rise
When is an output gap positive
When actual output exceeds potential output
What corresponds with a positive output gap
rising demand-pull and cost-push effects
In the Keynesian model what happens when AD increases
the negative output gap falls
When is LRAS not vertical
on the Keynesian model
What is the trade/economic/business cycle
it describes how the economy tends to show recurring trends in economic growth rates
What does the average trend line show
The overall growth over time (potential)
What is a boom
a period where the percentage rate of growth of real GDP is flat and higher than the short term trend
What is a slowdown
a decrease of the rate of growth, real GDP is still rising and higher than the long term trend
What is a recession
a period of at least a few months when an economy suffers a fall in aggregate output, employment, investment and business/consumer confidence
What is a recovery
a phase after a recession, during which real GDP starts to increase and unemployment begins to fall
What is a depression
A downturn in the economy where a nations real GDP falls by at least 10%
