Economic Growth and Cycle

• What is short-run economic growth measured by?

  % change in RGDP
• What does long-run economic growth indicate?

  Increase in productive capacity
• What does an increase in LRAS signify?

  Change in productive capacity
• What are the benefits of economic growth?

  • Employment increases
  • Higher tax revenue
  • Increased government spending
  • Improved standard of living (measured in RGDP per capita)
• What are the costs of economic growth?

  • Depletion of resources
  • Income inequality
  • Negative externalities (e.g., pollution)
  • Inflation
• What characterizes a negative output gap?

  Low inflation and high unemployment
• What is a positive output gap?

  Real GDP exceeds productive potential
• What causes recovery to boom in the economy?

  • Accelerator effect follows the multiplier effect
  • Leads to economic growth
• What is the boom-bust policy?

  Government allows economy to boom then bust
• What is the purpose of welfare benefits in the economy?

  Prevent deep recession and maintain confidence
• How does progressive taxation affect income growth?

  Pushes individuals into higher tax brackets
• What are automatic stabilizers in the economy?

  • Welfare benefits
  • Progressive taxation
  • Help stabilize economic fluctuations
• How is short-run economic growth defined?

  Annual percentage change in real national output
• What does long-run economic growth represent?

  Increase in productive potential of the economy
• What is the trend economic cycle?

  Average sustainable rate of economic growth
• What is the economic cycle?

  Fluctuation between expansion and contraction
• What does a positive output gap indicate?

  Real GDP is greater than productive potential
• What does a negative output gap indicate?

  Real GDP is below productive potential