Economic cycle

• What does the economic cycle illustrate?

  Output gaps
• What would happen if the actual level of output were always equal to trend output?


  There would be no output gap, meaning no economic cycle
• When do output gaps occur?


  When actual real output is greater or lower than the trend point
• What characterizes a negative output gap?


  The level of output is to the left of the LRAS curve and below normal capacity
• What occurs during a positive output gap?


  The economy temporarily produces outside its current production possibility frontier
• What are the characteristics of a negative output gap?


  • Actual GDP is less than potential GDP
  • Some factor resources are under-utilized
  • Main problems include higher unemployment and possible deflation risks
• What are the characteristics of a positive output gap?


  • Actual GDP is greater than potential GDP
  • Some resources are working beyond usual capacity
  • Main problems include rising demand-pull and cost-push inflationary pressures
• What are the negative impacts of a negative output gap?


  • Increased unemployment
  • Lower inflation
  • Reduced wage growth
  • Lower business confidence
  • Lower investment
  • Lower interest rates
  • Lower economic growth
• What are the positive impacts of a positive output gap?


  • Lower unemployment
  • Rising inflation
  • Higher interest rates
  • Increased business confidence
  • Faster wage growth
• How is the output gap defined?


  It is the difference between actual GDP and estimated potential GDP
• How is the output gap usually expressed?


  As a percentage of the level of potential output
• What does a negative output gap indicate in a diagram?


  The equilibrium level of national income (GDP) is less than long-run potential output
• What is a potential issue with a positive output gap in the long run?


  It can lead to unstable economic growth as inflation rises
• Why is estimating the output gap difficult?


  We cannot directly observe the supply potential of an economy
• What are some problems in estimating the output gap?


  • Inaccurate data on the labor force
  • Problems measuring productivity
  • Inaccurate surveys of producers about spare capacity
  • Gaps in knowledge about business investments
  • Uncertainties about discouraged workers
  • Difficulty measuring under-employment
• What causes changes in the phases of the economic cycle?

  • Fluctuations in aggregate demand
  • Supply side factors
  • Speculative bubbles
  • Political business cycle theory
  • Outside shocks
  • Changes in inventories
  • The Marxist explanation
  • Multiplier and accelerator effects
  • Climate cycles
• How does an increase in consumer spending affect the economic cycle?


  It leads to a recovery phase
• What impact do changes in technology have on the economy?


  They might be as important as changes in aggregate demand
• How do speculative bubbles influence consumer behavior?


  They lead to increased consumer spending as house prices rise
• What happens to aggregate demand as elections approach according to political cycle theory?


  Aggregate demand expands before elections and decreases afterward
• What effect do outside shocks have on the economy?


  They can affect how much a business can produce and therefore GDP
• How do changes in inventory affect GDP?


  Decreasing stock due to lower demand decreases output and GDP
• What does the Marxist explanation suggest about larger businesses?


  Larger businesses can increase or decrease production by acquiring smaller businesses
• How do the multiplier and accelerator effects interact?

  The multiplier process increases investment, which increases aggregate demand and output
• What happens during severe weather events like droughts or floods?

  Output decreases, causing a slowdown in the economy
• What was the trend of the output gap in the UK economy from 2000 to 2008?


  • A positive output gap accompanied a booming economy
  • The output gap decreased during the 2008-09 recession
  • It became positive again in 2018, but wages had begun to fall in deprived areas
• How did the UK's economic growth affect inequality?


  • Economic growth increased inequality in the UK
  • Many people's wages began to fall in more deprived areas