Theme 2: Economic Growth Flashcards
Draw and annotate the business cycle
The horizontal axis needs to be labelled with ‘Time’ and the vertical axis with ‘Real GDP’. The highest points show ‘Boom’ and the lowest points show ‘Recession’. The upward sloping part shows ‘Recovery’ and the downward sloping part shows ‘Slump’.
What is a recession?
When the economy experiences negative economic growth for two consecutive quarters. Also the part of the business cycle where real GDP is at its lowest.
What is a boom?
The part of the business cycle where real GDP is at its highest.
What is a slump?
The part of the business cycle where real GDP is decreasing.
What is a recovery?
The part of the business cycle where real GDP is increasing.
Draw the business cycle with trend potential GDP
Draw the business cycle and annotate the output gaps
What is potential trend GDP?
The sustainable rate of GDP growth caused by improvements in productive capacity overtime.
What is negative output gap?
When actual GDP is below potential trend GDP.
What is a positive output gap?
When actual GDP is above potential trend GDP.
Identify what A is in this diagram?
A negative output gap
Identify what A is in this diagram?
A positive output gap
What are the 5 characteristics of a boom?
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.
What are the 5 characteristics of a bust?
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 decreases.
