2.5 Economic Growth Flashcards
(27 cards)
what causes short-run economic growth
changes to any components of AD
what causes long-run economic growth
improvements in the quality or quantity of the FOPs (shifts of LRAS)
what is the difference between actual and potential economic growth
actual growth is when there is an increase in the quantity of G/S produced
potential growth is an increase in the productive potential of an economy (outward shift of PPF)
what is an output gap
the difference between the actual level of output (real GDP) and the maximum potential output (Yfe)
why is it hard to measure output gaps accurately
it is hard to know what the maximum productive potential of an economy is
what is the Keynesian recommendation for dealing with a negative output gap
only use demand side policies to generate economic growth
supply side policies have no effect if negative output gap exists (AD is on the horizontal section of AS)
interventionist supply side policies could work if they increase AD
what is the classical recommendation for dealing with a negative output gap
allow the markets to self-adjust
AD falls, causing price to fall, which causes SRAS to fall, and the equilibrium returns to Yfe
what are the points in the trade (business) cycle
peak/boom
recession
trough
recovery
what is the definition of a recession
two consecutive quarters of negative economic growth
what are the characteristics of a boom
growth faster than the trend
high profits
low unemployment
high consumer & business confidence
high demand for imports
rising tax revenues
inflation
what happens to unemployment in a recession
increasing/high unemployment
what happens to unemployment in a boom
decreasing unemployment and increasing jobs available
what happens to spare capacity in a recession
increasing negative output gap and thus spare production capacity
what happens to spare capacity in a boom
reduction of negative output gap so spare capacity reduced or eliminated
what happens to confidence in a recession
low confidence
what happens to confidence in a boom
high confidence and more risky decisions taken
what happens to inflation in a recession
low inflation
what happens to inflation in a boom
increasing inflation, usually demand-pull
what happens to the budget in a recession
increased government spending leads to a budget deficit
what happens to the budget in a boom
improvement in the government budget as tax revenue rises and expenditure falls
what are the benefits of economic growth
higher disposable income
higher employment
higher profits for firms
increase in tax revenue
what are the costs of economic growth
inflation
income inequality (one sector dominance, capital intensive, rural vs urban, poor quality jobs, lack of welfare state)
environmental costs
current account deficit
what is the evaluation for economic growth
sustainable growth
inclusive growth
balanced growth
role for private sector/government
what are the characteristics of a recession
declining AD
high unemployment
sharp falls in confidence/investment
de-stocking & discounting
fall in house prices & construction activity
lower demand-pull inflation
loose macro policy
low demand for imports
