Theme 2: Business Cycle Flashcards
What are the 7 macroeconomic objectives?
- Inflation rate of 2% plus or minus 1%.
- Economic growth as measured by an increase in real GDP.
- Full employment.
- Current account equilibrium, whereby the inflows are equal to the outflows.
- Balanced budget where government spending equals tax revenue.
- Reduce inequality.
- Protect the environment.
What is the business cycle?
The boom-bust cycle
What are the 4 sections of the business cycle?
- Boom
- Slowdown (slump)
- Bust (recession)
- Recovery
Draw a diagram illustrating the business cycle
What is the definition of a recession
Two or more consecutive quarters of negative economic growth.
What is the overall trend for GDP in the long run? And why?
In the long run real GDP increases. Due to long run improvements in technology.
What is the name of the line that shows overall changes in GDP?
Potential trend GDP
What is a positive output gap?
When actual GDP is above potential trend GDP.
What is a negative output gap?
Actual GDP is below trend GDP
Illustrate a short run negative output gap on a neoclassical diagram
What do neoclassical economists believe about output gaps?
Long run possible short run not possible
Draw and label the different parts of a Keynesian Long Run
Draw a diagram to show a negative output gap on the Keynesian LRAS
Draw a Keynesian long run output gap illustrating no output gap
Illustrate Demand pull inflation on a Keynesian LRAS
