2.5.3 trade cycle

Question 1

what is the macro objective for growth?

Answer 1

so that growth is strong,sustained and sustainable

Question 2

how would the diagram look like for a trade cycle?

Answer 2

label the x-axis as time
label the y-axis as real GDP
-draw a straight line pointing upward labelled as recovery trend growth
-draw a squiggly line labelled as actual growth
-the top part is BOOM
-the bottom part is Trough
-between the boom and trough is RECESSION
-the end part is RECOVERY

Question 3

what does the trend growth represent?

Answer 3

it shows how the economy would look if there was strong and sustained growth over a period of time

Question 4

but in reality, we know that growth cannot always be sustained, so what happens?

Answer 4

so the actual growth shows how it fluctuates up and down over a period of time, the reason that this curve is more realistic is because in the economy we face shocks that one can predict e.g COVID-19.

Question 5

what are the 4 different phases in this diagram?

Answer 5

1. Actual growth- this is the peak and that is called the BOOM where growth is rampant and very strong
2. then the BOOM will start slowing down that is called a recession which is defined as two quarters of negative growth
3. when recession gets worse it’s called trough
4. the last stage is recovery

Question 6

when actual growth is greater than potential growth what does this mean?

Answer 6

positive output gap

Question 7

when actual growth is lower than trend rate of growth what does this mean?

Answer 7

negative output gap

Question 8

during a boom what happens in the economy?

Answer 8

growth will be rampant

• firms have the incentive to produce a lot more
• there will be high manufacturing and construction work as a result
• they are able to sell a vast production of goods
• this means an increase for wage so low levels of unemployment
• consumer and business confidence is high
• as consumers have high disposable income there will be a rise in demand for imports that will drive consumer spending and investment
• gov will benefit through high tax revenues

Question 9

what is the eval for a boom?

Answer 9

there may be inflation a side effect of demand pull inflation

Question 10

what happens during a recession/trough?

Answer 10

• a decline in AD
• there will be a rise in unemployment as firms are getting rid of workers to maintain profit margins
• there will be less demand for labor
• fall in consumer and business confidence
• leading to a decline in investment, house prices, and construction
• firms will be de-stocking by getting rid of these stocks through discounting and sale
• expect low inflation, interest rates, and low taxes to stimulate the economy

Question 11

what happens during recovery?

Answer 11

• there will be a rise in consumer confidence
• there will be a rise in house prices
• a rise in business confidence
• higher investment in tech and innovation
• increase in construction
• increase in loose policy

Question 12

what happens when there are shocks in the demand side?

Answer 12

shocks that affect AD for example when there is a sudden increase in interest rates

• sudden fall in gov spending
• strengthening in exchange rates- net exports will decrease
• sudden housing crashes

Question 13

what happens when there are shocks in the supply side policy?

Answer 13

• when there are natural disasters that affect LRAS
• factors that shift SRAS for instance a sudden increase in the price of raw materials or a sudden increase in wages or business tax