2.5.1 The Business Cycle

Question 1

Boom characteristics

Answer 1

high rates of economic growth and production
Features: High profits, low unemployment, high inflation, shortages in supply. Rising demand, rising prices, more output
Impact on strategic and functional decisions: Firms make strategic decision to expand into new markets through market development.
Functional decision to expand workforce/ increase recruitment.
Businesses seek opportunities for efficiencies and cost reductions as a result of EOS.

Question 2

Recession

Answer 2

Output starts to fall, growth declines
Features: Production declines as demand falls. Government use policies to stimulate growth. Consumer/ business confidence starts to fall.
Impact on strategic and functional decisions: Expansion plans are ‘shelved’. Market penetration strategies become more attractive as they are low risk. Businesses stockpile products. Functions try to increase efficiency and cut costs- such as flexible working implemented.

Question 3

Slump

Answer 3

Prolonged period of economic decline
Features: High levels of unemployment, high rates of business failure/ closure, low interest rates, low levels of spending and investment.
Impact on strategic and functional decisions: Businesses adopt a strategy of rationalisation.
Functional decisions may include redundancies, scale down of production and reduction in capacity.
Businesses reduce prices and focus on their most profitable product lines.
Businesses may decide to cease trading or leave certain markets.

Question 4

Recovery

Answer 4

Economy starts to pick up after a period of decline
Features: Increasing consumer confidence, businesses start to invest/ take on new employees, spare capacity is used up
Impact on strategic and functional decisions: New business start-ups emerge, business investment rises- product development strategy. Businesses take on new employees and increase contracts to meet growth in demand. Functional decisions focus on ways to increase productivity- training, growth in production, increased marketing activity.

Question 5

Exchange rates and decision-making

Answer 5

Businesses try to avoid uncertainty when exchange rates are volatile. Businesses may set an agreed rate for future transactions.
A business may choose to target a specific international market when the exchange rate is favourable.
Importers: May switch international suppliers when the exchange rate is less favourable. Stockpile raw material and products when the currency is strong.
Exporters: Lower prices to limit the impact of a strong currency. Increase promotion in foreign markets when currency is weak.

Question 6

The interest rate is

Answer 6

the cost of borrowing money and the reward for saving

Question 7

High interest rates-

Answer 7

Consumer and business spending falls, inflation falls, stronger pound- Higher interest rates increase the value of a currency (Due to hot money flows, investors are more likely to save in British banks if UK rates are higher than other countries)

Question 8

Low interest rates

Answer 8

Consumer and business spending rises, inflation may rise, weaker £
interest rates set by bank of England.

Question 9

If interest rates go up e.g. 0% to 5%-

Answer 9

Encourages saving, more interest for leaving it in the bank
Less likely to ask for a loan as more expensive, more interest to pay.
Less money- less demand for goods and services that businesses provide. Particularly effects luxury goods, bad for businesses and might lead to redundancies, creating unemployment.

Producers- if go up, more expensive for a business to borrow money so postpone investments, if ltd company, may push them to use equity finance, more expensive debt than equity finance.

Question 10

IF INTEREST RATES GO DOWN E.G. 10% TO 2%

Answer 10

Discourages saving. Borrowing money is cheaper. More money in the economy so more demand for goods and services, increased demand for luxury goods. More employment as good for businesses.

For prooducers: cheaper to borrow money so more likely to invest e.g. new factory. so more production so more jobs so higher incomes, more disposable income to spend in the economy.

Question 11

Interest rates depends on

Answer 11

YED- Will have a limited impact for firms who sell essential goods/ services e.g. bread
Depends on the size of the interest rate change.

Question 12

Boom part 2

Answer 12

more output so increased employment to keep up with this, more demand as more people have jobs.
High demand pushes prices up so rising prices.

Question 13

Recession part 2

Answer 13

falling output so don’t need workers so increased unemployment. No job so demand falls so price falls.

Question 14

A business cycle is

Answer 14

A business cycle is a period over which there is economic expansion and contraction in a an economy, measured by GDP growth (%)