The Business Cycle

Question 1

Recession

Answer 1

When the economy experiences negative economic growth for two consecutive quarters.

Question 2

Boom

Answer 2

The part of the business cycle where real GDP is at its highest.

Question 3

Slump

Answer 3

The part of the business cycle where real GDP is decreasing.

Question 4

Recovery

Answer 4

The part of the business cycle where real GDP is increasing.

Question 5

Potential Trend GDP

Answer 5

The likely change in average GDP in the future, given expected improvements in technology

Question 6

Negative Output Gap

Answer 6

When actual GDP is below potential trend GDP.

Question 7

Positive Output Gap

Answer 7

When actual GDP is above potential trend GDP.

Question 8

What do neoclassical economists believe about short run and long run output gaps

Answer 8

D Short run output gaps are possible but long run output gaps are impossible.

In the short run, it is possible to have negative or positive output gaps. This is because the actual output (shown by the SRAS equilibrium) can be above or below the potential output (shown by the LRAS equilibrium). However, neoclassical economists believe that, in the long run, it is impossible to have negative or positive output gaps - they believe that actual output will already be at the long-run equilibrium!

Question 9

Which of the following is possible when using a Keynesian long run aggregate supply?

Answer 9

D A negative output gap or no output gap
A positive output gap is impossible because real GDP cannot increase beyond full employment.
- only inflation will happen bc increase in price leve

Question 10

Which of the following is likely to happen when animal spirits are high?

Answer 10

High animal spirits mean that investor confidence is high and consumer confidence is high. This means investors want to invest and consumers want to spend. Because investment is a component of AD, This increase will increase AD and shift it to the right.

Question 11

five characteristics of a boom.

Answer 11

1) High animal spirits increase consumption and investment.
2) High economic growth, measured by an increase in real GDP.
3) Demand pull inflation as the price level increases.
4) Low unemployment as firms demand more workers.
5) An improved budget as government spending decreases and tax revenue increases

Question 12

the five characteristics of a bust.

Answer 12

1. Low animal spirits decrease consumption and investment.
2. Low economic growth measured by a decrease in real GDP.
3. Low inflation or deflation as the price level decreases.
4. High unemployment as firms demand fewer workers.
5. A worsened budget as government spending increases and tax revenue decreas

Question 13

Why do neoclassical economists believe that long run output gaps are impossible

Answer 13

Neoclassical economists believe that, in the long run, the economy will always be at the full employment level of output. This is why they use a vertical LRAS curve. Using this model, actual output is always equal to potential output, meaning long run output gaps are impossible.

Question 14

How does demand pull inflation come tru with a boom?

Answer 14

As unemployment falls and economic growth increases, there will be an increase in AD. This will lead to demand pull inflation.