Business cycle

Recession

Two or more consecutive quarters of negative economic growth

Boom

part of business cycle where real GDP is at its highest

slump

The part of the business cycle where real GDP is decreasing

recovery

The part of the business cycle where real GDP is increasing

Potential trend GDP

The sustainable rate of GDP growth caused by improvements in productive capacity overtime caused by technological advancement

Negative output gap

Economy isn’t using resources efficiently (actual output less than potential output)

Positive output gap

The economy is producing above its potential, overusing its resources (actual output greater than potential output)

Characteristics of boom

1)High animal spirits-consumers and businesses confident about the economy-increase in consumption, investment, shift AD out, 2)economic growth, 3) increase in price level lead to demand pull inflation. 4) high economic growth increase real GDP, increase derived demand for labour as firms need labour to increase output, more workers are employed, reducing unemployment 5) if people are in paid employment, government spending on benefits decrease, and income tax revenue will increase, decreasing budget deficit, moving closer to balanced budget (macroeconomic aim)

Characteristics of bust

1)Low animal spirits mean that investor confidence and consumer confidence are both low. This means that investors don’t want to invest and consumers don’t want to spend. This will decrease AD as investment and consumption are components of AD. So, AD will shift to the left. 2)shift left in AD means Negative economic growth and a decrease in price level which leads to 3)low inflation or deflation 4)fall in real GDP means firms need to decrease output, derived demand for labour will decrease, causing increase in unemployment 5) If fewer people are in paid employment, government spending on benefits will increase and income tax revenue will decrease, which will increase the budget deficit because the government has to borrow more money