8.4 The Business Cycle Flashcards
(21 cards)
What is economic growth?
Increase in total real output (real GDP) produced by an economy over time.
Economic growth is a key indicator of economic health.
Define recession.
An economic contraction where real GDP falls for two consecutive quarters or more.
A recession indicates a significant decline in economic activity.
What is a positive output gap?
Real GDP > Potential GDP; unemployment falls below the natural rate, inflation likely.
This indicates an overheated economy.
What is a negative output gap?
Real GDP < Potential GDP; unemployment rises above the natural rate.
This indicates underutilization of resources.
How is the output gap calculated?
Actual GDP – Potential GDP (positive = inflationary gap, negative = recessionary gap).
The output gap helps assess economic performance.
Axis in business cycle
x = time
y = real GDP
This axis shows the progression of economic cycles.
What occurs during the expansion stage of the business cycle?
Positive growth rate; increased employment of resources; rising inflation pressure.
Expansions typically lead to higher consumer spending.
What characterizes the peak stage of the business cycle?
Real GDP at its maximum; resources fully employed; inflation may be high.
The peak is often followed by a contraction.
What happens during the contraction stage of the business cycle?
Real GDP falls; unemployment rises; inflation slows (may lead to deflation); recession if 6+ months.
Contractions can lead to significant economic challenges.
What is a trough in the business cycle?
Real GDP at its lowest; high unemployment; economy may require stimulus to recover.
Troughs represent the lowest point before recovery begins.
What do short-term fluctuations in the business cycle represent?
Alternating expansions and contractions of real GDP.
These fluctuations are temporary and reflect immediate economic changes.
What does long-term growth in the business cycle show?
Shows how potential output increases over time (trend line).
Long-term growth is essential for overall economic health.
What does the straight line for potential output represent?
Long-Run Aggregate Supply (LRAS).
This line indicates the economy’s capacity at full employment.
What indicates a positive output gap in the business cycle?
Actual GDP is above potential GDP.
This can lead to inflationary pressures.
What indicates a negative output gap in the business cycle?
Actual GDP is below potential GDP.
This can lead to higher unemployment.
What is the relation of low unemployment to the business cycle?
Reached near peaks/expansion phases when economy approaches potential output.
Low unemployment is a key goal of economic policy.
How is low and stable inflation achieved in the business cycle?
Achieved when economy grows steadily near potential GDP without large output gaps.
This stability is crucial for economic confidence.
What ensures sustainable economic growth in the business cycle?
Long-term upward trend of potential GDP, not just short bursts of growth (expansions).
Sustainable growth is vital for long-term prosperity.
Sketch a biz cycle diagram
- show upward slope & downward slope
- label ‘actual output’
- label growth trend if given
- label; expansion, contraction, peak, through , (recession&boom)
- relevant to data
Inflation
Overall increase in price levels in an economy over a sustained amount of time
unemployment
people who do not have jobs but are actively looking for work
