The Business Cycle

Question 1

What is negative output gap?

Answer 1

When the economy is not using resources efficiently.

Question 2

What is a positive output gap.

Answer 2

Its when the economy is producing above its potential trend

Question 3

What is a recession

Answer 3

When there has been two or more consecutive quarters of negative economic growth

Question 4

When does a negative output gap occur

Answer 4

When actual GDP is below potential trend GDP

Question 5

When does positive output gap occur

Answer 5

When actual GDP is above potential trend GDP

Question 6

Negative and positive output gaps can also be shown in a

Answer 6

Neoclassical diagram using both sras and LRAS for short run output gaps but no long run output gaps

Question 7

What are the five characteristics of a economic boom

Answer 7

-High animal spirits (consumers and producers feel more confident about the economy so they increase consumption and investment)
-High economic growth( increase in consumption and increase in investment leading to an increase in AD)
- demand pull inflation (an increase in AD will increase PL)
-low unemployment (increased demand for labour, increasing employment)
-improved budget(more people working gov can reduce spending on benefits and collect more income tax, reducing its deficit.

Question 8

What are the 5 characteristics of a bust (recession)

Answer 8

-low animal spirits
-negative economic growth
-low inflation/deflation
-high unemployment
-worsened budget

Question 9

Who are speculators

Answer 9

People who buy asset in anticipation of it increasing in price

Question 10

When does an asset bubble develop

Answer 10

When theres a right combination of speculation, herd behaviour

Question 11

What is an asset price bubble

Answer 11

When the price of an asset is determined by its predicted future price