2.5.1 The Economic Cycle Flashcards
1
Q
The economic cycle
A
Describes the fluctuations in the levels and rates of growth of GDP over a period of time
2
Q
4 phases in an economic cycle
A
4 phases to an economic cycle → overall trend is upwards, in the long run
- Boom: fast growth
- Downturn: boom slows and rate of growth decreases
- Recession: negative growth
- Recovery: positive growth returns, slowly at first then picking up pace
3
Q
key government macro objectives
A
- Price stability
- Sustainable growth of real GDP
- Falling unemployment/rising employment
- Higher average living standards (national income per capita)
- Improved global competitiveness/trade balance
- More equitable distribution of income and wealth
4
Q
how does a boom become a recession
A
- Rate of GDP increases and so does AD
- Firms respond by increasing output, so more resources are used, including labour
- Unemployment falls, newly employed have more to spend, further reinforcing demand
- Incomes generally may increase as firms try to attract more labour
- New businesses start up and existing ones expand, encouraged by the surge in demand and optimism about the future
- As the boom progresses inflation is likely to increase as demand in the economy begins to exceed the economies ability to supply (too much chase for too few goods)
- Shortages of resources may cause costs of production to rise and firms may pass these on as higher prices, leading to inflation
- Policies to reduce inflation reduce spending, downturn begins
5
Q
how does a recession become a boom
A
- Downturn leads to falling profits and sales and profits and encourages gloomy expectations
- If it persists, it may become a recession, defined as two consecutive quarters of negative economic growth
- Output is falling, firms needing fewer resources make some unemployed redundant and unemployment rises
- Competition for the few jobs available means that firms do not need to offer pay rises (real wages may fall)
- Those who lose their jobs have less disposable income, demand in the economy falls
- Firms lose confidence and are reluctant to invest, slowing the economy down further
- Inflation is no longer a problem as there is not upward pressure prices
- Expansionary policies will be used to encourage spending and investment, stimulating demand
6
Q
characteristics of a boom
A
- Low unemployment
- High income per head
- low interest rates
- Demand pull inflation due to more consumer spending
- Cost push inflation if resources become scarce due to high demand
- Limited spare capacity → very little more the economy could produce
- High investment levels (more confidence, more borrowing)
- Low government spending
- High retail sales
- High demand of normal goods
- Rate of growth of GDP increases
- Level of demand in economy (AD) increases
7
Q
characteristics of a recession
A
- High unemployment
- Low income per head
- High demand of inferior goods
- Low inflation
- Lots of spare activity
- Low investment levels
- High government spending
- Low retail sales
8
Q
inflation in a boom
A
- Inflation is a general and consistent rise in the level of prices
- Demand pull I caused by too much money chasing too few goods
- Aggregate demand outweighs the economy’s ability to supply
- Cost push inflation: due to a rise in costs of production
- BOOM: every has a job, so all resources used so hard to make more
- BOOM: everyone’s income increases, as there are more jobs
- Demand increases for little so prices increase
9
Q
why do you get inflation in a boom
A
- In a boom, there is high employment and so their incomes increase
- As disposable income increases, they are willing to spend more on goods and services
- Firms need to meet that demand, but they find it difficult to produce more as most people have a job → hard to increase output
- Demand increases faster than the economy’s ability to supply
- As aggregate demand increases, prices also increase → demand pull inflation
10
Q
how are different firms affected by the economic cycle
A
- inferior vs normal goods
- income elastic
- income inelastic
11
Q
the beveridge report and gov welfare state implementation
A
- 5 giants: want, idleness, squalor, ignorance, disease
- Social security (welfare benefits), gov (full employment), butler education act 1944, grammars, housing, NHS 1948
- Nationalisation → government buys key industries, british rail, british gas
12
Q
government spending in a recession
A
- government spending is higher in R due to welfare payments
- Spending goes down in a B due to more people in work
- Increase in G borrowing in R
- Tax revenue goes down (real incomes decrease) and spending goes up so G borrowing increases
- Decrease in G borrowing in B
- Tax revenue goes up and spending goes down so they can pay back their debts
13
Q
unemployment in the economic cycle
A
- Rises in Recession and falls in Booms
- 1980: Thatcherite, didnt deal with unemployment like it did in the past → no moderation
- British economy was also changing from manufacturing to industry sector
- Deindustrialisation: industrial workers became structurally unemployed and gov didnt try to help, seen as natural point of the economy
- Easy way for thatcher to deal with trade unions (no job = no trade union)
- Incentive for people with Jobs → dont strike if afraid to lose jobs like 3 million others
14
Q
inflation in the EC
A
- Due to 1973-4 and 1979 OPEC oil price rises
- Things are now more expensive to make, causing cost-push inflation
- In a boom, demand pull inflation increases → more disposable income
- In a recession, demand pull inflation decreases
15
Q
interest rates in the EC
A
- Government use them as a tool of monetary policy to manage the economy
- In a boom, demand pull inflation rise
- To lower demand-pull inflation, the government wants to lower aggregate demand
- So govt will increase interest rate → saving increases so consumer spending decreases
- Borrowing credit also goes down (it is more expensive to borrow)
- Borrowing costing more means firms will invest less
- So, aggregate demand will go down, so demand pull inflation will go down –> AD = C + I + G + (X-M)
- However, other parts of the economy suffer
- Firms will make less profit, less goods will be produced
- This will cause the economy to grow slower (mortgages etc)
