11.1 Economic Growth and the Economic Cycle

What is short-run economic growth

It is the annual percentage increase in a country’s real GDP, caused by increases in aggregate demand

What is long-run economic growth

It occurs when the productive capacity of the economy increases, caused by an increase in aggregate supply

What is potential output

The level of output an economy can produce if all resources are fully employed

What is an output gap

The difference between actual and potential levels of output

What characterises a negative output gap

Actual output is less than potential output, leads to unemployment and downward pressure on inflation

What characterises a positive output gap

Actual output is greater than potential output, resources are overused, causing upward pressure on inflation

What is the economic cycle

The fluctuations in economic growth over time, including booms and recessions

Draw the Economic Cycle

What happens during a boom

Fast economic growth, near full employment, positive output gaps, demand-pull inflation

What happens during a recession

Negative growth over two consecutive quarters, spare capacity, rising unemployment, and lower inflation

How might government respond to a recession

Increase spending, cut taxes, raise welfare benefits to stimulate demand

What benefits do consumers gain from economic growth

Growth increases confidence, leading to higher consumption and living standards

What are consumer costs of economic growth

Higher inflation, greater inequality

What benefits do firms gain from economic growth

Higher profits, investment, economies of scale, better export opportunities

What are menu costs

The costs to firms of changing prices frequently due to inflation

How does economic growth benefits the government

Increased tax revenues, reduced welfare spending which improves the budget