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Questions and Answers
What happens to the trend line if the average level of potential output that is unutilized stays constant from one cycle to another?
The trend line will have the same slope as the potential output line.
What is the effect of a rapid rise in aggregate demand on firms?
It stimulates firms to increase output.
What is the relationship between actual growth and potential growth?
Actual growth stimulates investment and the development of new technology, which in turn affects potential growth.
What is the marginal efficiency of capital in the example given?
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What is the role of investment in economic growth?
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What is the effect of changes in aggregate demand on national output?
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What is the relationship between the business cycle and potential output?
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What is the difference between the trend rate of growth and the potential rate of growth?
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What is the effect of expansion of potential output on aggregate demand?
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What is the significance of the trend line in understanding economic growth?
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Study Notes
Short-term Growth and the Business Cycle
- A business cycle is defined as alternating periods of economic growth and contraction in an economy.
- The business cycle has four phases: upturn, expansion, peak, and slowdown or recession.
- Actual GDP above trend for a number of years indicates an expansion or boom, while below trend indicates contraction or recession.
Actual and Potential National Income
- Actual growth is the percentage annual increase in national output.
- Potential economic growth is the percentage annual increase in the economy's capacity to produce.
- Contributors to potential economic growth include:
- Discovery of natural resources
- Technological advances leading to efficiency
Growth and the Production Possibility Curve
- Growth in actual output shifts the production possibility curve outward.
- Growth in potential output shifts the production possibility curve outward at a faster rate.
- Growth in both actual and potential output shifts the production possibility curve outward at an even faster rate.
The Business Cycle
- The business cycle is the periodic fluctuation of national output around its long-term trend.
- Ignoring cyclical fluctuations, the trend line has the same slope as the potential output line.
- The trend rate of growth is the same as the potential rate of growth.
Causes of Fluctuations in Growth
- Changes in aggregate demand can cause fluctuations in growth.
- Changes in aggregate demand relative to potential output can also cause fluctuations.
Long-term Economic Growth
- Actual growth stimulates investment and the development of new technology.
- Investment plays a twin role in economic growth: it increases output and stimulates further growth.
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Description
Learn about the business cycle, its phases, and the difference between actual and potential national income in this macroeconomics quiz.
