The Economic Cycle

Question 1

What is an economic cycle

Answer 1

When GDP growth fluctuates around the trend (or underlying) growth

Question 2

What is a boom

Answer 2

When the rate of GDP growth is fast and higher than the long-term trend (positive output gap)

Question 3

What is a business cycle

Answer 3

Short-run fluctuations of national output (real GDP) around its long-term trend

Question 4

What is national income

Answer 4

Everything produced, earned and spent in a country over a period of time

Question 5

What is a slowdown

Answer 5

A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate

Question 6

What is a recession

Answer 6

A period of at least six months when an economy suffers a fall in output. Or a broadly-based contraction in output, employment, investment and confidence

Question 7

What is a recovery

Answer 7

A phase of the cycle, after a recession, during which real GDP starts to increase and unemployment begins to fall

Question 8

What is a depression

Answer 8

A prolonged downturn in the economy and where a nation’s real GDP falls by at least 10% from peak to trough

Question 9

When was the last recession in the U.K.

Answer 9

2008 and 2009 where there was a cumulative fall in RNO of about 5%

Question 10

What happens during an economic recovery

Answer 10

AD will be rising (= increase in RNO and a fall in the amount of spare capacity)

Question 11

What is the output gap

Answer 11

The difference between the actual level of GDP and it’s estimated potential level. It is usually expressed as a % of the level of potential output.

Question 12

What happens if actual GDP is less than potential GDP

Answer 12

There is a negative output gap

Question 13

What is the actual level of real GDP

Answer 13

The intersection of AD and SRAS

Question 14

What happens if actual GDP is greater than potential GDP

Answer 14

There is a positive output gap

Question 15

Features of a positive output gap

Answer 15

• some resources are working beyond their normal capacity

- the main problem is likely to be an acceleration of consumer price inflation

Question 16

Problems in estimating the output gap

Answer 16

• inaccurate data on the labour force survey
• problems in accurately measuring productivity
• surveys of producers about spare capacity may be inaccurate
• gaps in knowledge about how much businesses are investing and the potential output from new capital
• uncertainties about the number of people who may have left the labour market as ‘discouraged workers’
• hard to measure the amount of under-employment in the labour market at different stages of the cycle

Question 17

Examples of demand-side shocks

Answer 17

• economic downturn in a trading partner
• unexpected tax increases
• financial crisis causing bank lending to fall
• bigger than expected rise in unemployment

Question 18

Examples of supply-side shocks

Answer 18

• steep rise in commodity prices
• political turmoil/strikes
• natural disasters
• unexpected breakthroughs in production technology

Question 19

Possible causes of a recession

Answer 19

External events
Tightening of macro policy
Fall in asset prices or supply of credit
Drop in business and consumer confidence

Question 20

Short term economic effects of a recession

Answer 20

Business products and capital investment
Unemployment
Government finances
Inflation

Question 21

Long term economic effects of an inflation

Answer 21

• rising structural long-term unemployment and regional decline
• low rates of investment can reduce the size of the capital stock
• persistent budget (fiscal) deficits and a rising national debt leads to austerity (cut in public services)

Question 22

Long term social effects of a recession

Answer 22

• falling real wages hits average living standards and reduces demand
• widening inequality of income and wealth leading to rising poverty
• social costs such as loss of social cohesion and threats to democracy

Question 23

What are the two competing views about the effects of a recession

Answer 23

Hysteresis

Creative destruction

Question 24

What is hysteresis in a recession

Answer 24

When an economy is disabled by recession there is a risk of loss of output.
Loss of productive capacity due to low capital investment.
High rates of structural unemployment.

Question 25

What is creative destruction in a recession

Answer 25

Capitalist market economies usually bounce back from a recession.
Print emergence of new businesses.
New technologies act as a catalyst for renewed economic growth and investment.

Question 26

What is the difference between recession and depression

Answer 26

A depression is a prolonged slump over a number of years where real GDP falls by more than 10% from the peak of the cycle to the trough.

Question 27

What is the misery index

Answer 27

A light-hearted attempt to use macroeconomic data to track the scale and extent of misery for different countries

Question 28

How do u calculate the misery index

Answer 28

Unemployment + interest rate - % change in real GDP per capita of a country

Question 29

Why is GDP growth difficult to measure

Answer 29

• uncertain business confidence levels
• fluctuations in the XR
• external events
• macro policy changes
• rate of business job creation