Economic Growth and Cycle

Question 1

What are the 4 phases of economic cycle?

Answer 1

• boom/expansion
• slowdown
• recession
• recovery

Question 2

what is a boom/expansion?

Answer 2

when the level of real output becomes greater than the trend level of output. ends when upswing of economic cycle gives way to next downswing

Question 3

what is slowdown?

Answer 3

occurs when rate of growth decelerates but national output is still rising

Question 4

what is recession?

Answer 4

when real national output is falling for 6 months or more. a severe recession lasting 2 years or more is called a depression

Question 5

what is recovery?

Answer 5

occurs when real GDP begins to grow after the end of a recession, or at the end of the trough of the economy cycle

Question 6

what does economic boom mean overall? lcr

Answer 6

-fast growth of consumption
-due to rising real incomes, strong confidence, surge
in house prices
-pick up in demand for capital goods due to investing in extra capacity
-more jobs created, falling unemployment, higher real wages
-high demand for imports therefore run a larger trade deficit
-government tax revenues will rise
-increase in inflationary pressures (demand might outstretch supply) if economy overheats and has a positive output gap

Question 7

what does economic recovery mean overall? lcr

Answer 7

• rising aggregate demand leads to increase in real national output and fall in amount of spare capacity
• rise in government borrowing

Question 8

what does economic recession mean overall? lcr

Answer 8

• falling demand
• rising unemployment
• some firms go out of business
• low confidence in the economy and most firms will reduce investment

Question 9

possible causes of a recession:

Answer 9

• external events
• tightening of macro policy
• fall in asset prices or supply of credit
• drop in business and consumer confidence

Question 10

short term economic effects of a recession:

Answer 10

• business profits and capital investment
• unemployment
• government finances
• deflation

Question 11

long term economic and social effects of a recession:

Answer 11

economic:
- 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

social:

• falling real wages
• widening inequality of income and wealth leading to rising poverty
• social costs like loss of social cohesion and threats to democracy

Question 12

causes of economic cycle:

Answer 12

• fluctuations in aggregate demand
• supply-side factors i.e. changes in technology
• speculative bubbles i.e. rapid economic growth leads to a rapid rise and speculative bubble in asset prices
• political business cycle theory i.e. party may buy votes
• outside shocks: demand and/or supply side shocks
• climatic cycles
• multiplier/accelerator interaction

Question 13

what is short-run economic growth?

Answer 13

the actual annual percentage change in real national output

Question 14

causes of short-run economic growth:

Answer 14

• changes in aggregate demand
• changes in short-run aggregate supply
• short-term policy changes
• short-term demand and supply side shocks

Question 15

what are the impacts of shocks on economic growth:

Answer 15

• demand-side shocks refer to unexpected changes in the economy that directly impact on aggregate demand
• supply-side shocks refer to unexpected changes in the economy that directly impact on aggregate supply

Question 16

benefits of economic growth:

Answer 16

• higher living standards
• employment effects
• fiscal dividend
• accelerator effect