3.2.3.1 ECONOMIC GROWTH AND THE ECONOMIC CYCLE

Define short run (macro)

The period in which at least one factor of production is fixed (usually capital) and prices (wages are slow to adjust), so output is mainly influenced by aggregate demand

Define long run (macro)

The period in which all factors of production can change and prices/wages are fully flexible, so output is determined by the economy's productive capacity (LRAS)

How are the axis labeled on a macro PPF?

Capital goods and consumer goods

How is economic growth shown on a PPF? (Short and long run)

Short - C-A

Long - A-B

Define demand side

Relates to the impact of changes in aggregate demand on the economy. Associated with Keynesian economics

Define supply side

Relates to changes in the potential output of the economy, which is affected by the available factors of production. Eg. Changes in the size of the labour force, and the productivity of labour

In the Keynesian diagram what does each stage represent?

Flat - recession

Upward sloping - output increases

Vertical - full employment (economy is at full capacity)

Define trend growth rate

The rate at which output can grow, on a sustained basis, without putting upwards or downwards pressure on inflation

It reflects the annual average % increase the productive capacity of the economy

Define economic cycle

(Also known as a business cycle or trade cycle)

Upswing or downswing in aggregate economic activity taking place over 4-12 years

Key factors affecting long run economic growth (6)

• investment

• productivity

• labour supply

• research

• innovation

• enterprise

Key factors affecting short run economic growth (6)

• interest rates set by the central bank

• fiscal policy - government spending and taxation

• commodity prices such as oil, gas, foodstuffs

• exchange rates

• trading conditions in other countries