11.1 Economic Growth And Economic Cycle

Question 1

What is the measurement of economic growth?

Answer 1

Performed by simply measuring the the % of annual change in real gdp or possibly real gdp per capita

Question 2

Diagram for both short-run and long-run economic growth

Answer 2

Question 3

What is the demand side?

Answer 3

Relates to the impact of changes in AD on the economy (associated with Keynesian economics)

Question 4

What is short run economic growth primarily cussed by?

Answer 4

Demand-some changes in the economy

Question 5

Short run economic growth is shown by the AD equation

AD=C+I+G+(x-M)

What do the letters stand for

Answer 5

Aggregate demand
Consumption
Investment
Gov spending
Exports
Imports

Question 6

Diagram for comparing the effects on economic growth of rightward shifts of the AD curve

Answer 6

Question 7

What is x-M also known as

Answer 7

Net trade

Question 8

What changes the position of the AD curve

Answer 8

The AD equation

AD=C+I+G+(x-M)

Question 9

What is supply side ?

Answer 9

Relates to changes in the potential output of the economy which is affected by the availability of factors of production

E.g changes in the size of the labour force and the productivity of labour

Question 10

What causes short run economic growth

Answer 10

Anything that will shift the SRAS to the right

Question 11

What causes short run economic growth:

Give examples

Answer 11

Fall in money wage rates

Fall in cost of production

Fall of taxes on firms

Increase subsidies on firms

Question 12

As output rises what happens to the SRAS curve?

Answer 12

Begins to slope upwards which means fitter increase of AD will lead to inflation as well as rising real output

Question 13

When the economy reaches the LRAS curve what is needed for more growth ?

Answer 13

Short-run growth must give way for long-run growth

Question 14

What leads to economic growth (supply side)

Answer 14

Anything that shifts SRAS to the right (although main effect of supply side is on the LRAS)

Question 15

What is the trend growth rate?

Answer 15

The rate at which output can grow on a sustained basis,without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy

Question 16

What is the economic cycle

Answer 16

Upswing and downswing in aggregate economic activity taking place over 4-12 years

Question 17

Diagram of long run economic growth shifting LRAS to the right

Answer 17

Question 18

Where to the causes of long run economic growth lie?(it is in the supply side of the economy)(5)

Answer 18

Improvements in tech (investment and technical progress)

Increase in labour force size

Improvements in productivity

Mobility of factors or production

Economic incentives for entrepreneurs and workers they employ

Question 19

Long run growth is affected by the supply side by why does AD have a part to play

Answer 19

Firms will only price more goods if there is sufficient demand to absorb the output

Question 20

What are the two main theories of economic growth

Answer 20

Neoclassical theory
New growth theory

Question 21

two main theories of economic growth

Neoclassical argument

Answer 21

A sustained increase in investment increases economys growth rate temporarily. Ratio of labour to capital goes up

Rate at which labour productivity Improves Is determined by technological progress

However theory does not say how technical progress comes about

Question 22

two main theories of economic growth

New growth theory

Answer 22

Replaced neoclassical because it explains how technical progress comes about:

-profit seeking research

-openness to ideas from overseas

-accumulation of human capital

Question 23

What are the costs of economic growth (6) (reduce economic welfare)

Answer 23

-uses up finite resources that can’t be replaced (oil and minerals)

-leads to pollution and other forms of environmental degradation

-can destroy local cultures and communities and widen inequalities in distribution of wealth and income

Leads to growth of bid cities-loss of good agricultural land

In early phases raid population increase-more people to feed-more people who are poor

-there are countries with low growth if there are ones with high growth (associate negatives e.g low profits low investment ect ect)

Question 24

Benefits of economic growth(7)

Answer 24

Increases standard of living and ppls welfare

Provides new environmentally friendly technologies

May lead to more civilised communities

Route out of poverty

Produces a ‘fiscal dividend’ tax revs that growth generates (tax can be used to correct market failures)

Greater business confidence and increased investment in technology

Question 25

Who benefits and who looses from economic growth

Answer 25

W: rich people higher welfare and incomes L: poor, loss of jobs and increased inequality Economic growth more harms than benefits to the environment

Question 26

What are the two ways fluctuations happen in the economy?

Answer 26

-seasonal Cyclical over many years

Question 27

What is actual output

Answer 27

Level of real output produced in the economy in a particular year (Don’t confuse with Trend level of output which is what the economy is capable of producing)

Question 27

How long is an economic cycle ?

Answer 27

4-12 years

Question 28

Diagram for economic cycle

Answer 28

Question 29

Diagram for upswings and downswings in the economic cycle

Answer 29

Question 30

What are the explanations for fluctuations in the phases of the economic cycle?

Answer 30

-fluctuations in AD -supply-side factors -the role of speculative bubbles -political business cycle theory -outside shocks hitting the economy -changes in inventories -the Marxist explanation -multiplier/acceleration interaction -climatic cycles

Question 31

What are the explanations for fluctuations in the phases of the economic cycle? The role of speculative bubbles

Answer 31

Rapid economic growth leads to a rapid rise and speculative bubbles in asset prices

Question 32

What are the explanations for fluctuations in the phases of the economic cycle? Changes in inventory

Answer 32

Firms can also invest in stocks of raw materials and in stocks of finished goods waiting to be sold -key determinant in recessions As stocks accumulate firms forced to cut production by more than the original fall in demand

Question 33

Diagram for output and employment in economic cycles

Answer 33

Question 34

What are output gaps?

Answer 34

Show the level of actual real output in the economy either higher or lower than trend level of outoutn

Question 35

Positive output gap

Answer 35

The level of actual real output in the economy is greater than the trend output level

Question 36

Negative output gap

Answer 36

The level of actual real output in the economy is lower than the trend output level

Question 37

Diagram for negative and positive output gaps in an economic cycle

Answer 37

Question 38

When does a gov define an economic cycle as beginning and ending

Answer 38

When there are no output gaps

Question 39

Negative and positive ouotungaps illustrated on an AS/AD diagram

Answer 39