Theme 2- Output gaps & Business cycle (key terms)

Question 1

Trend growth

Answer 1

The long-term rate of growth - the potential rate of growth in the capacity of economy

Question 2

Business cycle

Answer 2

When actual economic growth (AD) fluctuates around the long-term trend rate of growth

Question 3

Seasonal adjustments

Answer 3

Estimates in which the element of variability due to seasonal influences, which may distort the data, has been removed. Affects data such as unemployment, retail sales and output from highly seasonal industries

Question 4

Shocks

Answer 4

Unexpected events that can affect both aggregate demand and supply e.g. unexpected changes in world oil prices

Question 5

Short run economic growth

Answer 5

Short run growth is cyclical; the growth of real GDP is determined by aggregate demand (C+I+G+X-M) and also factors affecting short run aggregate supply (SRAS)

Question 6

Exogeneous shock

Answer 6

An unexpected event beyond the control of the country’s officials that has a large negative impact on its economy

Question 7

Negative output gap

Answer 7

When actual GDP is below estimated potential GDP

Question 8

Output gap

Answer 8

Difference between actual and potential national output

Question 9

Positive output gap

Answer 9

occurs when the actual level of output is greater than the potential level of output

Question 10

Boom

Answer 10

A period of rapid economic expansion resulting in higher GDP, lower unemployment, rising inflation rates and rising asset prices

Question 11

Depression

Answer 11

Used to describe a severe recession which may become a prolonged downturn and where a nation’s real GDP falls by at least 10 per cent

Question 12

Double dip recession

Answer 12

When an economy goes into recession twice without a full recovery in between

Question 13

Hysteresis

Answer 13

When a sustained period of low aggregate demand can lead to permanent damage to the supply side of the economy, for example because of high long-term unemployment

Question 14

Peak

Answer 14

The high point of the economic cycle beyond which a recession starts

Question 15

Recession

Answer 15

A period of at least six months when real GDP decline - a contraction in output, employment, investment and confidence

Question 16

Recovery

Answer 16

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

Question 17

Slump

Answer 17

A sustained decrease in real GDP and a persistent rise in unemployment

Question 18

Trough

Answer 18

The low point of the economic cycle beyond which a recovery starts

Question 19

Soft landing

Answer 19

A slowdown in economic activity but which does not result in a recession

Question 20

FDI

Answer 20

Inflows of capital from foreign multinationals (MNCs) including takeovers and tangible investment in new factories and technology

Question 21

Non-inflationary growth

Answer 21

Sustained growth of real national output whilst maintaining price stability

Question 22

Balanced growth

Answer 22

Occurs when output and the capital stock grow at the same rate. Also refers to balanced expansion of components of aggregate demand

Question 23

Environmental economics

Answer 23

Studies the impact of environmental policies and devises solutions to problems resulting from them. The approach can either be prescriptive or incentive-based