Week 20 - Chapter 24: Short Term Fluctuations

Question 1

Business cycle

Answer 1

Short term fluctuation in GDP and other variables.

Question 2

Recession/contraction

Answer 2

• A period in which the economy is growing at a rate significantly below normal.
• Occurs when GDP falls for 2 or more consecutive quarters or when real GDP growth is well below normal or even negative.

Question 3

Depression

Answer 3

A particularly severe recession.

Question 4

Expansion

Answer 4

A period in which the economy is growing at a rate significantly above normal.

Question 5

Boom

Answer 5

A strong and long-lasting expansion.

Question 6

Peak

Answer 6

• The high point of a business cycle.
• The beginning of a recession.

Question 7

Trough

Answer 7

• The low point of a business cycle.
• The end of a recession.

Question 8

Do recessions and expansions have regular lengths/severity

Answer 8

The lengths and severity of expansions and recessions are irregular.

Question 9

Symptoms of business cycles

Answer 9

• Increased cyclical unemployment.
• Production of durable goods is more volatile than services and non-durable goods.

Question 10

Potential output (Y*)

Answer 10

The maximum sustainable amount of output an economy can produce.
Potential output will rise over time, actual output will grow at a variable rate which reflects the growth rate of Y*

Question 11

Output gap

Answer 11

The difference between an economies actual and potential output, relative to potential output.

Question 12

Output gap formula

Answer 12

Output gap = (Y-Y* / Y*) × 100

Question 13

Recessionary gap

Answer 13

• Output gap is negative.
• Occurs where Y* > Y.
• Capital and labour resources are not fully utilised.
• Output and employment are below normal levels.
• u > u*.

Question 14

Expansionary gap

Answer 14

• Output gap is positive.
• Occurs where Y* < Y.
• Output and employment are above normal levels.
• Demand for goods exceeds capacity to produce them leading to higher prices.
• Leads to inflation and decreased economic efficiency.
• u < u*

Question 15

How do output gaps happen

Answer 15

• Economic booms and recessions increase/decrease output gap.
• Changes in economy wide spending - main reason in the short run.
• Economy takes time to reach equilibrium price and quantity.

Question 16

Frictional employment

Answer 16

Short term unemployment related to matching of workers and jobs.

Question 17

Structural unemployment

Answer 17

Long-term chronic unemployment in normal conditions.
Can be caused by workers having outdated skills which cause them to struggle to find employment.

Question 18

Natural rate of unemployment (u*)

Answer 18

The sum of frictional and structural employment.
When u = u* (no frictional employment), output is at its maximum sustainable amount (Y=Y*).

Question 19

Cyclical unemployment

Answer 19

Unemployment caused by recessions - recessions decrease demand for goods and services which decreases demand for labour, causing layoffs and unemployment.
The difference between total unemployment and natural rate of unemployment.
Cyclical unemployment = u – u*.

Question 20

Okun’s law

Answer 20

One percentage point increase in cyclical unemployment means a 2 percent widening of a negative output gap, measured in relation to potential output.
It relates changes in cyclical unemployment to changes in the output gap.

Question 21

How are output gaps decreased

Answer 21

Stabilisation policies are considered when output gaps exist.
Economy also has self correcting mechanisms that can reduce output gaps naturally - firms adjust to output gaps by slowing the increase of price or increasing prices.