week 20 Flashcards
what are business cycles
short term fluctuations in GDP and other variables
what is a recession
a period in which the economy is growing at a rate significantly below normal
real GDP falls, doesn’t have to be negative
what is a depression
a particularly severe recession
what is a peak
the beginning of a recession
high point in business cycle
what is a trough
the end of a recession
low point in business cycle
what is an expansion
a period in which the economy is growing at a rate significantly above normal
what is a boom
a strong, long-lasting expansion
what are the symptoms of business cycles
cyclical unemployment increases sharply during recessions
production of durable goods is more volatile than non-durable goods
what is potential output
Y*
the maximum sustainable output that an economy can produce
also called full-time employment output
grows over time
what is actual output
grows at a variable rate
reflects growth of Y*
does not always = potential output
what is the output gap
the difference between the economy’s actual output and potential output, relative to potential output at a point in time
how do you calculate output gap
(Y - Y) / Y x 100
what is a recessionary gap
negative output gap Y*>Y
output and employment are less than sustainable level
capital and labour resources are not fully utilised
output and employment below normal levels
what is an expansionary gap
Y*<Y
leads to inflation - reduces economic efficiency
higher output and employment
demands for goods exceeds the capacity to produce them and prices rise
what is the natural rate of unemployment
the sum of frictional and structural unemployment, u*
occurs when Y is at Y*
what is cyclical unemployment in terms of U
the difference between total unemployment u and u*
what is okun’s law
relates to cyclical unemployment changes in the output gap
why is the output gap important
because of the impact it has on our standard of living
what causes output gaps
changes in total spending at preset prices and wages affects output levels
why do output gaps arise
markets require time to reach equilibrium price and quantity
firms dont change prices frequently
frequent price changes are confusing
economy has self-correcting mechanisms so prices reach equilibrium and eliminate output gaps
what is production capacity
daily output is determined by production capacity: amount of capital, labour employed and productivity of capital and labour
capacity changes slowly, but periodic disruptions occur
what are demand fluctuations
predictable changes hour by hour
unpredictable changes in demand
how are prices set
fully flexible prices are unrealistic
prices set by: competitors, product strengths and weaknesses, analyses sales over time to see if adjustments are needed
