2.5.3 Trade (Business) Cycle

Question 1

What is a Boom

Answer 1

period where growth of GDP is higher than long-term growth

Question 2

What is a slow down

Answer 2

period of growth where growth of GDP is increasing at a slower rate

Question 3

What is a recession

Answer 3

period of at least 2 quarters where the economy has a fall in aggregate output, employment, investment and confidence

Question 4

What is Recovery

Answer 4

Phase after a recession which real GDP starts to increase and unemployment falls

Question 5

What is a depression

Answer 5

prolonger downturn in the economy where a nations GDP falls ≥10%

Question 6

Characteristics of a Boom

Economic growth, inflation, employment, BoP, Aggregate demand/supply, national income and output

Answer 6

1. Increase in GPL = increased income, wages and inflationary pressures
2. Increase business + consumer confidence
3. Increased business profits = increased investment
4. Increased trade deficit
5. Increased use of scarce resources
6. Falling (cyclical) budget deficit

Question 7

Characteristics of a recession

Economic growth, inflation, employment, BoP, Aggregate demand/supply, national income and output

Answer 7

1. Falling GPL = falling income, stagnant wages, decreased inflationary pressures
2. Reduced business + consumer confidence
3. Rising unemployment
4. Reduced business profits = reduced investment
5. Reduced trade deficit
6. Less use of scarce resources
7. Rising (cyclical) budget deficit

Question 8

How would you show a recession on a classical AD/AS diagram

Answer 8

A contraction in AD

Causing a negative output gap

Question 9

How would you show a recession on a Keynesian diagram

Answer 9

Contraction in AD

Question 10

The cause for a recession frequently is

Answer 10

a fall in AD

Question 11

Possible causes of falls in AD which cause a recession

Answer 11

1. External events - recession in trading partner, increase in commodity prices
2. Tightening of Macro policy - higher interest rates and taxation
3. Fall in asset prices or supply of credit
4. Drop-in consumer + business confidence - less spending and investment

Question 12

What else could a recession be caused by

(not linked to AD)

Answer 12

Supply-side shocks

Inward shift in short-run aggregate demand

e.g. commodity prices, mineral + metal prices + imports tariffs and quotas

Question 13

4 Short term effects of a recession

Answer 13

1. fall in business profits + investment
2. Cyclical unemployment
3. Growing fiscal deficit
4. Lower rate of inflation

Question 14

3 Long-term effects of a recession

Answer 14

1. Structural unemployment
2. Lower rates of investment + capital stock
3. Rising national debt + prolonged deficit