2.5.1 , 2.5.2 , 2.5.3 Flashcards
(28 cards)
what is a positive output gap
growth of real GDP above the trend
what is a negative output gap
growth of GDP below the trend
what is a recession
two consecutive quarters of decline in the countries real GDP
what is a boom
a period of rapid economic expansion that’s faster than the estimated trend rate of growth resulting in lower unemployment, accelerating inflation rate and rising asset prices. Booms usually result in a positive output gap and rising demand-pull and cost-push inflationary pressures.
what is employment like in a boom and recession
recession - high unemployment
boom - low unemployment
what is spare capacity like in a boom and a recession
recession - lots of spare productive capacity
boom - reduced or eliminated spare capacity
what is confidence like in a recession and a boom
recession - low consumer confidence
boom - high consumer confidence
what is inflation like in a recession and a boom
recession - low inflation
boom - increasing rate of inflation
what is the budget position like in a boom and recession
recession - increased government expenditure leading to a great budget deficit
boom - improvement in the government budget as tax revenue rise and expenditure falls
how can a positive output gap be seen in real life
rapidly rising prices
how can a negative output gap be seen in real life
rising unemployment and slowdown in economic growth
what is short run / actual growth
an increase in AD - using the spare capacity to increase real GDP
how is short run/ actual growth modelled on an ad/as diagram
a rightward shift of ad that closes the negative output gap closer to yfe
how is short run/actual growth modelled on a ppc diagram
moving from a point inside the curve to a point closer to the curve
when does actual economic growth occur
it occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time
how is actual growth measured
measured by the percentage change in real GDP
how can short run/actual growth happen in real life examples
lower interest rates - c i (x-m)
lower income/ coroparation tax - c i
higher consumption/ business confidence - c i
high government spending - g
weaker exchange rate - (X-M)
what is long run/potential economic growth
an increase in LRAS - increase productive capacity of the economy
what is long run economic growth caused by
caused by an improvements to the quality and quantity of the factors of production ( CELL Q2) - the determinants of LRAS
how is potential economic growth modelled on a ppc diagram and LRAS curve
shown through an outward shift of the productive potential of an economy
how can long-run / potential economic growth happen in real life examples
increase in labour productivity
increase in workforce size (immigration)
investment
infrastructure improvements
increase in competition
new resource discovery
what are the macro-economic impacts of a boom
- Falling unemployment and rising employment rates as cyclical unemployment drops
- Boom in consumption can drive higher business capital investment via a positive accelerator effect
- Increasing direct and indirect tax revenues for the government helping to reduce a fiscal deficit
- increase in a country’s trade deficit if the boom leads to a surge in import demand
- Risks of a rise in cost-push and demand-pull inflation as the output gap becomes positive and supply constraints are reached.
what are the micro-economic impacts of a boom
- Rising super normal profits for many businesses as demand is growing
- Increased output leads to more jobs being available since labour has a derived demand - depending on the businesses income elasticity
- Households should see a rise in incomes, perhaps helping to reduce the extent of absolute poverty, though relative poverty might widen
- surge in asset prices including rising house prices however this causes more expensive properties to rent
- Possible environmental consequences for example, increased waste and emissions from higher production & consumption
how does an economic boom come to an end
- Rising inflation leads to a tightening of monetary policy by central banks – higher interest rates curb spending and lead to a rise in saving
- If prices start rising faster than incomes, then real spending power of consumers begins to drop
- With rising costs, business confidence turns and planned capital investment may decline
- External factors causing a boom may reverse leading to a contraction in export sales, production & investment
- Asset price booms (bubbles) burst – for example, stocks, shares and housing becomes less valuable – leading to a negative wealth effect
- Once an economic boom finishes, banks may become reluctant to lend – credit becomes harder to access and more expensive
