2.2.4 - Government expenditure

Question 1

What are the 4 stages of the business cycle?

Answer 1

1 - boom/peak
2 - downturn
3 - recession
4 - recovery/expansion

Question 2

What is on the axis of the business cycle?

Answer 2

x-axis = time
y-axis = real output

Question 3

What happens in stage 1 of the business cycle - boom/peak?

Answer 3

National income is high, economy at full employment, consumption and investment are high, tax revenues are high. Wages and profits will be increasing. There may be inflationary pressure.

Question 4

What happens in stage 2 of the business cycle - downturn?

Answer 4

Output and income fall, consumption and investment fall, tax revenues decrease, governments expenditure rises, unemployment rises. Imports decline, less inflationary pressure.

Question 5

What happens in stage 3 of the business cycle - recession?

Answer 5

Low economic activity. High unemployment; consumption, investment and imports are low. Few inflationary pressures, prices may be falling.

Question 6

What happen in stage 4 of the business cycle - recovery?

Answer 6

National income and output begin to increase. Unemployment falls. Consumption, investment and imports begin to rise. Inflationary pressures begin to mount.

Question 7

How is government spending (G) affected the the business cycle?

Answer 7

Boom - low g due to high income and employment
Downturn - increased g due to a rise in unemployment
Recession - g may be high due to high unemployment
Recovery - g would begin to fall, unemployment levels are decreasing.

Question 8

How does the business cycle affects taxes (T)?

Answer 8

Boom - high tax revenue due to high income
Downturn - tax revenues decrease
Recession - low tax revenue
Recovery - tax revenues increase