Business cycle

5 Macroeconomic objectives of the economy :

1) Inflation

2) Economic growth

3) Full employment

4) Current account equilibrium where outflows are equal to inflows

5) Balanced budget where government spending > tax revenue

6) Reduced inequality

7) Enviornmental sustainability

Draw the business cycle

done

recession

two or more consecutive quarters of negative economic growth

Negative output gap:

when actual GDP is below potential trend in GDP

Positive output gap:

when actual GDP is above potential trend in GDP

Neo-classical short run negative output gap draw:

done

Neo-classical short run positive output gap draw:

done

neo-classical economist believe there are no:

output gaps in the long run

keynesian long run output gaps draw a negative output gap:

done

Keynesian economist believe that:

In the long run there are no positive output gaps

Characteristics of a boom:

1. High animal spirits

2. High economic growth

3. Demand pull inflation

4. Lower unemployment

5. Lower budget deficit

Characteristics of a recession:

1. Low animal spirits

2. Low economic grwoth

3. Low inflation/ Deflation

4. High unemployment

5. Worsened budget