2.5 The Economic Cycle

Question 1

What is the economic cycle

Answer 1

Describes the fluctuations in the levels and rates of growth of GDP over a period of time

Question 2

What are the main factors causing GDP to grow

Answer 2

Higher productivity - Increased investment, new tech, improvements to education and training

New sources of natural resources

Question 3

What are the 4 stages of the economic cycle (in chronological order)

Answer 3

Boom - Rapid growth and expansion
Downturn - the boom slows and growth rates decrease
Recession - 2 consecutive quarters of negative growth
Recovery - positive growth returns

Question 4

Describe the chain reaction of an economic boom (8 parts)

Answer 4

• GDP increases
• Demand increases
• Output increases, more resources used
• Lower unemployment
• More disposable income
• More investments into new businesses and expansion
• Inflation increases as demand starts to exceed supply. This is because there is too much money and not enough resource, higher prices are charged for raw materials and therefore the good.
• Policies to reduce spending are put in place

The downturn begins

Question 5

Describe the chain reaction of an economic recession (5 parts)

Answer 5

• Reduced sales from high inflation
• Low profit
• Output falls - low demand
• High unemployment (no need for workers)
• Wages fall
• Lower incomes
• Less investment
• Inflation is reduced
• Policies to increase spending are put in place

The recovery begins

Question 6

How does the economic cycle affect businesses differently

Answer 6

It depends upon the price elasticity or quality (inferior or luxury) of the product the business offers.

Question 7

How might the boom affect businesses positively and negatively?

Answer 7

P - Elastic (normal) goods will do very well. More demand, output and investment.

N - Inferior goods will fall in demand. prices may rise as demand exceeds supply. Resource scarceness. Increased inflation.

Question 8

How might the recession affect businesses positively and negatively?

Answer 8

N - Normal ,elastic, goods will fall. Unemployment rises and demand falls. Low investment.

P - Inferior goods will increase demand. Supply exceeds demand, prices fall. Low inflation.

Question 9

Explain, or draw, the circular flow of income, expenditure and profit

Answer 9

Houses -> savings, taxes, spending on imports -> to banks, government and abroad -> Investment, government spending, spending on exports (respectively) -> Firms -> Payment for factors of production (labour, land, capital and enterprise)

Question 10

What are leakages and injections

Answer 10

Leakages - Reduce the demand for domestically produced goods and services by diverting people’s income to savings, taxes and imports.

Injections - Investment, government spending and exports - increase demand for domestically produced goods and services

Leakages = Injections —–> Equilibrium

If one outweighs the other, the economic cycle is propelled

Question 11

Increased leakages lead to what?

Answer 11

Lower demand (more saving)
Lower consumer spending (taxation)

Question 12

What is aggregate demand + the formula

Answer 12

The sum total of demand from all sources in the economy.

C + I + G + (X-M)

C - Consumption (household spending on products)
I - Investment (Spending on capital assets)
G - Government spending (Public spending)
X - Exports
M - Imports

(if exports exceed imports - net injection)
(if imports exceed exports - net leakage)

Question 13

What’s aggregate supply

Answer 13

The total output from all sources in the economy

Question 14

What does the aggregate demand and supply graph look like

Answer 14

Google the image

The horizontal AS curve shows where capacity reaches capacity and prices don’t need to rise as more is made
The curve of the AS shows how resources become more scarce and costs/prices rise (inflation)
At full capacity, there are no resources left to increase supply so an increase in AD will mean prices increase.

If costs rise, AS will shift up.

If productivity rises, AS will shift right

Question 15

How can full capacity output be increased

Answer 15

New tech to increase efficiency
Investment into capital assets
More resources available

Question 16

What’s the differences between disinflation and deflation

Answer 16

Dis - A decrease in the rate of increased inflation

De - Prices are falling

Question 17

What are prices indices and how are they measured

Answer 17

Measure changes in the general level of prices (inflation), a basket of goods measures this (the most bought products)

Question 18

What’s CPI

Answer 18

The Consumer Price Index
Government’s basis for inflation levels
Doesn’t include mortgage interest or housing

Question 19

What’s RPI

Answer 19

Retail Price Index
Inflation measure that does include mortgages/housing
Decides the state pension and benefits

Question 20

What is a real value

Answer 20

Anything that’s taken into account the effects of inflation

Question 21

What’s a current price

Answer 21

Value each item of the price that year

Question 22

What’s a constant price

Answer 22

The value it would’ve had in its base year, with inflation removed

Question 23

What are the 2 main causes of inflation

Answer 23

Demand-pull : The economy is overheating in a boom. AD exceeds AS. Prices and inflation increases.

Cost-push : The costs of production are rising and prices are higher. AS shifts upwards

Question 24

What are the 2 main impacts of inflation to businesses

Answer 24

Uncertainty - Can’t make accurate forecasts, less likely to invest due to this.
Loss of competitiveness - Exports are less competitive abroad, higher costs/prices.

Question 25

What are the 2 main impacts of inflation to individuals

Answer 25

Savers - if inflation is higher than interest rates, savings are worth less.

Fixed income - If inflation increases, their income doesn’t, less disposable income.

Borrowers - gain because the value of money falls and they don’t have to repay the same value over time.

Question 26

Define employment

Answer 26

All those people aged between 16 and 64 who are in work (7.2% in 2018)

Question 27

What’s the difference between unemployment and underemployment

Answer 27

Unemployment refers to those who are willing and able to work but cannot find a job.
Underemployment refers to those who are in a job which doesn’t use their qualifications to the full (skill waste)

Question 28

What are the 2 measures of employment

Answer 28

The claimant count - those who claiming unemployment benefits
Labour force survey - Counts those available and seeking work

Question 29

What are the 5 forms of unemployment

Answer 29

Structural - When people have the wrong skills for the job, can come from structural change or relocation

Occupational immobility - People can’t adapt to meet the changing needs of the job at hand

Geographical immobility - People can’t move to where the jobs are, usually due to family ties

Technological - Tech replaces humans

Cyclical - Downturn in the economic cycle. As demand falls, people are no longer required to work.

Question 30

How can unemployment affect individuals, society and the government positively and negatively

Answer 30

P - Don’t have to work
N - Opportunity cost (loss of potential output and growth), more employment benefits needed to be spent, opportunity cost of less money in health and education, less taxes for the government, social costs (health issues, crime).

Question 31

What’s frictional unemployment

Answer 31

Those between jobs

Question 32

How can increased unemployment effect businesses

Answer 32

Less people working - less disposable income - less demand - low profits

Inelastic goods see a large drop in sales

Elastic (normal) goods may benefit

Easier to fill job vacancies (more available)

Wages may decrease (lower costs)