The Economic Cycle Flashcards
Positive output gap
Economy producing more goods and services than trend outpit
If well above, experiencing boom and inflation increasses
Boom
Period of strong growth
Recovery
Economic growth after a recession
Negative output gap
Economy produces less gdp than trend output
Economy may be slowing down or recession or slump
Recession
Negative economic growth for 2 consecutive quaters
Slump
Prologed period of recession
Fiscal gov policies
Tax and gov spending
Monetary gov policies
Interest rates and money supply
What cauuses a recession
Fall in ad (all other things being equal) is likely to cause a recession
-lower ad, economy settles at lower level of gdp and lower price level
Impact of recession on gdp
-lower consumer confidence- spend less esp on non-essential goods, luxury goods eg. Cars and holidays
-loss of jobs
-pay cuts
—demand for inferior gods increases- goods we buy more of when incomes fall (Aldi food, primark clothes)
Impact of recession on unemployment
Cyclical unemployment increases
As firms cut jobs or close down
Impact of recession on gov finances
-revenues decrease
Less vat- less spending
Less coperation tax- less profits
Less income tax- as unemployment increases
-spenidng increases
Ui- unempllyment increases
May result in increased gov borrowing- cushion the impact of recession
Impact of recession on equity
Unemployment increases- waste of human resources
Gov spending on welfare not education- which helps for more equitable society
Exaccerbated by rich profiting from recession- buying cheap houses
Impact of recession on inflation
-demand-pull inflation should fall
-risk of deflation
Impact of recession on current account on the balance of payments
-deficit decreased- more balances
-consumers less money to spend on foreign imports
Impact of recession on environment
Imporved
-as gdp decreases, less goods and services produced
Less non biodegradable waste
Less pollution creatsed
Less usage of non-renewables
Causes of growth/boom
Increase r&d- technological improvembets
Expanding exports market
Impact of growth/bppm on frms and individuals
-firms encouraged to exoand- invest in new plants, premices, machinery
-firms employ more as expand
-trade union power greater- easier to demand more when companies strong- little threat of redundancy
Impact of economic growth on gdp
Gdp increase- more gods and services producted
Increase living standards
Impact growth on unemployment
More firms expand and employ more
Cyclical unemployment should fall
Impact growth on gov finances
Tax revenues increase
More incomes and national insurance
More spending- eg. Vat
Coperation taz
Less spending
Ui decrease as unemployment decrease
Impact of growth on equity
-gov more to spend on other sectors such as education, housing and health and infrastructure
-decrease unemployment
Impact of growth on inflation
Demand-pull inflationo increase due to more demand- as more to spend
Positive output gap
Impact of growth on current account of the balance of payments
Decrease
Defecit increase
More imports as incomes increase- eg. Foreign holidays
Impact of growth on environment
Worsens
More goods and services produced- more waste
Ad+
Consumer spending + investment + gov spending + (exports - imports)
Multiplier effect- negative
-proportional decrease in exports
Net withdrawals > injections
-investment falls- workers in firms that produce capital lose jobs and so spend less
-demand for goods and services- spend less
More loose jobs
Cycle repeats
Contraction of economy
Gdp decreases
Injections
Investment
Exports
Gov spending
Withdrawals
Tax
Spending
Imports
Increase in gdp=
Multiplier x increase net injections
1=
Mpsave +mptax +mpimport +mpconsume
Multplier calculation =
1/1-mpc
1/mps+mpm+mpt
Marginal propensityu
Proportion of income
When does the multiplier take place
Disequilibrium between net withdrawals and net injections
Not consumer spending
Ad=
Consumer spending + gov spenidng + investment + (exports-imports)
