week 6

Question 1

business cycles - recessions

Answer 1

• 2 quarters in which the rate of growth of real GDP is negative
• coincided with a sharp increase in the rate of unemployment
• fluctuations in economic activity are difficult to predict and are irregular in length

Question 2

potential output

Answer 2

• amount of output the economy is capable of producing when using
• > labour and capital
• it will grow with capital, labour and productivity

Question 3

output gap

Answer 3

• how far is actual output from potential level?

Question 4

okuns law

Answer 4

• in aus, each 1% of unemployment leads to a fall of gdp of 1.8%

Question 5

keynesian model

Answer 5

• applies only to short run
• not a long run growth model
• price levels fixed
• AD determines GDP
• Role of model is to evaluate role of government in stabilising markets

Question 6

disequilibrium

Answer 6

• sales are more than expected
• low inventory
• low supply
• less than expected
• high inventory
• excess supply

Question 7

paradox of thrift

Answer 7

• in short run, increase saving means a fall in planned expenditure and lower equilibrium level of GDP
• increase saving failed
• consumption spending is a virtue
• saving in recession can be harmful