The Business Cycle

Question 1

What is economic growth?

Answer 1

Increase in the quantity of output produced over a period of time

Question 2

How is economic growth represented?

Answer 2

Percentage change in real GDP/GNI

Question 3

What is the business cycle?

Answer 3

Short-term fluctuations in the growth of real output (i.e. GDP/GNI) over time

Question 4

What are the four phases of the business cycle?

Answer 4

1. Peak
2. Contraction
3. Trough
4. Expansion

Question 5

What is potential output?

Answer 5

The level of GDP produced when the economy is on its long-term growth trend.

It is the level of output produced when there is full employment

Question 6

What is expansion?

Answer 6

1. Economy is growing at a rate beyond its long-run growth trend
2. Increase in real GDP => increases employment => increases general price level of economy

Question 7

What is peak?

Answer 7

Represents the cycle’s maximum real GDP and marks the end of the expansion phase

Question 8

What is contraction?

Answer 8

1. Economy begins to experience negative growth
2. Unemployment increases and price levels fall
   * if the contraction lasts two or more quarters, it is known as a recession

Question 9

What is trough?

Answer 9

Represents the cycle’s minimum real GDP and marks the end of contraction

Question 10

What is an output gap?

Answer 10

Actual GDP - Potential GDP

Question 11

What is the relation between actual GDP, potential GDP, and unemployment?

Answer 11

When Actual GDP < Potential GDP, unemployment is greater than the natural rate

Question 12

What are the 3 causes of the business cycle?

Answer 12

1. Major innovations may trigger new investment and/or consumer spending
2. Changes in labour productivity and size of work force
3. Negative Supply/Demand Shocks
   - Supply side shock: wars, natural disasters
   - Demand side shock: increase in interest rate, decrease in government spending

Question 13

What are the 4 objectives of Macroeconomic policy and the business cycle?

Answer 13

1. Full employment
2. Price-stability
3. Economic growth
4. Improved equality in the distribution of income

Question 14

What is the significance of the business cycle in relation to the 4 Macroeconomic Objectives?

Answer 14

An economy meeting its macroeconomic objectives will achieve growth that is closer to the long-run trend line; there will be less volatility and uncertainty in the economy