The National Economy - Short-term economic growth and the business cycle

6 important questions on The National Economy - Short-term economic growth and the business cycle

What is potential growth? 

The speed at which the economy could grow, it's the percentage annual increase in the economy's capacity to produce. 

What happens when the actual output is smaller than the potential output? 

The output gap is negative and the economy is operating below the normal capacity utilisation. 

Name 2 major factors contributing to potential economic growth? 

1. Increase in resources: natural resources, labour and capital 
2. Increase in efficiency with which these resources are used (advanced technology, improved labour skills or improved organisation)
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What will happen when actual growth < potential growth? 

There is an increase in spare capacity and probably an increase in unemployement, the output gap will become more negative or less positive. 

In what way can a negative output gap be closed? 

The actual growth should rise temporarily and exceed potential growth. In the long-run the actual growth rate will be limited to the potential growth rate. 

Name the 4 phases of the business cycle? 

1. Upturn
2. Expansion (highest rate of growth)
3. Peaking out (highest level of output)
4. Slowdown, recession or slump

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