Th2.5: Hysteresis

Question 1

What suggests that there is a little problem with large fluctuations in output?

Answer 1

the fact that the economy tends to return the trend line, and go above it, even after a serious recession

Question 2

Overall, why should the economy be in no better position in the long term?

Answer 2

as output lost in a recession is regained in a boom

Question 3

What is a problem that can occur during a recession?

Answer 3

many become unemployed and this has many negative effects: these people have a lower SOL, even if it is only for a short time

Question 4

Why do those on fixed incomes suffer during a boom?

Answer 4

their real income decreases as prices rise due to inflation

Question 5

What is hysteresis?

Answer 5

the argument by economists that economies do not bounce back to their previous trend level of growth

Question 6

Why may an economy never fully recover from a deep recession?

Answer 6

due to a permanent loss of labour (e.g people may take early retirement if they are made redundant, some may lose skills and some may become discouraged)
- moreover it may lead to a loss of physical capital
both causing a fall in potential output

Question 7

During recessions, what will consumers and firms see?

Answer 7

consumers - lower incomes and living standards

firms - lower revenues and profit