Economic Growth & Economic Cycle - Macro

Question 1

What is short run economic growth?

Answer 1

How much the total value of goods and services produced in an economy increases from one year to the next

Question 2

What is long run economic growth?

Answer 2

When the productive capacity of an economy increases
The trend rate of ‘growth of real national output in an economy’

Question 3

What is an output gap?

Answer 3

The difference between the actual level of output and the potential level of output

Question 4

What are the effects of a negative output gap?

Answer 4

• puts downward pressure on inflation
• causes a lot of spare capacity

Question 5

What are the causes of a positive output gap?

Answer 5

• resources being used beyond the normal capacity (e.g. labour working overtime)
• an increase in productivity (this puts an upward pressure on inflation)

Question 6

What is the economic cycle

Answer 6

The process that economies forever go through of boom, slowdown, recession and recovery

Question 7

What is recovery?

Answer 7

When an economy is progressing past a recession and beginning to expand again

Question 8

What is boom?

Answer 8

When the level of real output becomes greater than the trend level of output

Question 9

What is slowdown?

Answer 9

The phase before a recession when an economy experiences very little growth

Question 10

What is a recession?

Answer 10

Negative colonic growth over two consecutive quarters
It is the lowest point within an economic growth cycle

Question 11

What does the government usually do during a recession?

Answer 11

• increase spending to try and stimulate the economy (e.g. more welfare payments, cutting taxes)

Question 12

What is a wealth effect?

Answer 12

The purchasing power of income increasing / decreasing when the price level changes

Question 13

How is economic growth measured?

Answer 13

By the percentage annual change in GDP

Question 14

What is the trend growth rate?

Answer 14

The rate at which output can grow, on a sustained basis, without putting an upward or downward pressure on inflation

Question 15

What is a depression?

Answer 15

A severe recession lasting longer than 2 years

Question 16

What type of fluctuations occur in an economy?

Answer 16

Seasonal fluctuations
Cyclical fluctuations

Question 17

What are seasonal fluctuations?

Answer 17

Fluctuations in the economy that are largely caused by changes in the weather e.g. seasonal employment in travel and tourism

Question 18

How frequently does the economic cycle occur?

Answer 18

Approx. Every 4-12 years

Question 19

What causes economic cycles?

Answer 19

Fluctuations in aggregate demand

Question 20

What is aggregate demand

Answer 20

The total demand for goods and services in an economy

Question 21

Why does aggregate demand fluctuate?

Answer 21

Consumer and business confidence giving way to pessimism

Question 22

What is an output gap/

Answer 22

When the level of actual real output is greater/lower than the trend output level

Question 23

What is a hysteresis?

Answer 23

The effect of a disturbance on the course of the economy

Question 24

What are the benefits of economic growth?

Answer 24

1. Increases living standards
2. Can lead to more civilised communities who take action to improve the environment
3. Produces a fiscal dividend

Question 25

What is a fiscal dividend?

Answer 25

An increase in tax revenue that growth generates

Question 26

Why are fiscal dividends useful in an economy?

Answer 26

1. Can be used to provide infrastructure 2. Can be used to promote the means of reducing disease (e.g. better healthcare, more accessible appointments for people to be treated)- this therefore increases peoples life expectancies and overall welfare

Question 27

What are the costs of economic growth?

Answer 27

1. Uses up finite resources 2. Leads to urbanisation 3. Leads to a rapid growth in population

Question 28

Why is the use of finite resources a consequence?

Answer 28

contributes to pollution (and other forms of environmental degradation)

Question 29

Why is urbanisation a consequence of economic growth

Answer 29

It swallows up good agricultural land

Question 30

Why is a rapid growth in population a consequence of economic growth?

Answer 30

- more mouths to feed - wider inequalities in the distribution of income - higher poverty rates

Question 31

What are the four macroeconomic objectives?

Answer 31

1. (High and sustainable) economic growth 2. (To achieve and maintain) full employment 3. Price stability 4. (Equilibrium of) the balance of payments

Question 32

What is a policy objective?

Answer 32

A target/ goal that a government wishes to achieve

Question 33

What is GDP?

Answer 33

The sum of all goods and services produced in an economy in one year

Question 34

What is real GDP?

Answer 34

A measure of all the goods and services produced in an economy, adjusted for inflation, in one year

Question 35

What is nominal GDP?

Answer 35

GDP that hasn’t been adjusted for inflation

Question 36

What is inflation?

Answer 36

A general rise in the average price levels across the economy

Question 37

What is inflation?

Answer 37

A general rise in the average price levels across the economy

Question 38

What is absolute price stability?

Answer 38

A zero annual rate of inflation

Question 39

What is the optimal inflation rate the government wishes to achieve?

Answer 39

2%

Question 40

What is deflation?

Answer 40

When the average price level of goods and services falls

Question 41

What is disinflation?

Answer 41

When the rate of inflation is falling but still positive

Question 42

What two measures are used to calculate consumer price inflation?

Answer 42

CPI (consumer price index) and RPI (retail price index)

Question 43

What is consumer price index?

Answer 43

The average price increase of a basket of 700 ‘commonly’ bought goods and services

Question 44

What is retail price index?

Answer 44

The CPI including housing costs such as mortgage costs and council tax

Question 45

What is gdp per capita?

Answer 45

The average economic output per person

Question 46

How is gdp per capita calculated?

Answer 46

GDP / population

Question 47

What is HDI?

Answer 47

Human development index

Question 48

What indicators does HDI take into consideration?

Answer 48

Life expectancy Education Per capita income

Question 49

What is real wage growth?

Answer 49

When nominal wages rise faster than the rate of inflation

Question 50

List the macroeconomic indicators

Answer 50

Growth, unemployment, inflation, trade, distribution of income

Question 51

Define the multiplier effect

Answer 51

When an initial change in AD (usually gov spending) leads to a larger change in national income Gov spending becomes someone’s income They spend one and save some That spending becomes someone’s income They spend some and save some The process repeats The ripple effect throughout the economy leads to an increase in consumption and therefore total AD

Question 52

What is the total value of the marginal propensity to consume and the marginal propensity to save?

Answer 52

1

Question 53

What is the formula to calculate the multiplier effect

Answer 53

1/MPS

Question 54

What’s is the formula for the monetary value the multiplier effect has on the economy?

Answer 54

Gov spending x multiplier effect

Question 55

What is the formula for the tax multiplier

Answer 55

Multiplier effect - 1