Understanding the Trade Cycle and Output Gaps

The video explains the trade cycle diagram, highlighting its four stages: economic upturn, boom, downturn, and slump. It describes how real GDP fluctuates around a trend line representing potential output. Each stage is detailed with its economic indicators, such as unemployment and inflation. The video also introduces output gaps, where actual output deviates from potential output, and discusses their implications.

What does the trend line in the trade cycle diagram represent?

• Actual output of the economy

• Inflation rate

• Potential output of the economy

• Unemployment rate

During an economic upturn, what typically happens to unemployment?

• It increases

• It decreases

• It remains constant

• It fluctuates randomly

What is a common characteristic of the boom stage in the trade cycle?

• Decreasing consumer confidence

• High unemployment

• Low inflation

• High economic growth

What typically happens to government benefit spending during a boom?

• It fluctuates unpredictably

• It remains constant

• It decreases

• It increases

What happens to consumer and business confidence during an economic downturn?

• It decreases

• It becomes unpredictable

• It remains unchanged

• It increases

In a slump, what is the typical state of economic growth?

• Unpredictable

• Stable and moderate

• Low and potentially negative

• High and positive

Which stage of the trade cycle is characterized by high unemployment and low inflation?

• Slump

• Downturn

• Upturn

• Boom

During which stage of the trade cycle is consumer spending relatively low?

• Boom

• Upturn

• Downturn

• Slump

What is a positive output gap?

• When actual output is below potential output

• When actual output is above potential output

• When actual output equals potential output

• When potential output is negative

What does a negative output gap indicate?

• Actual output is above potential output

• Potential output is decreasing

• Actual output is below potential output

• Potential output is increasing