2.5.3 Trade (business) Cycle

Question 1

Trade/business cycle

Answer 1

how the economy tends to exhibit recurring trends in economic growth rates

Question 2

Characteristics of a boom

Answer 2

• high rates of economic growth
• low rates of unemployment (low levels of spare capacity)
• demand-pull inflationary pressures
• high consumer and business confidence
• improving govt budget balance

Question 3

Why does a boom improve govt budget balance?

Answer 3

• as tax revenue rises, and govt expenditure on benefits falls

Question 4

Characteristics of recession

Answer 4

• negative rates of economic growth
• high rate of unemployment (particularly demand-deficient unemployment)
• low rate of inflation
• low business and consumer confidence
• a worsening govt budget balance

Question 5

How economies recover after recession?

Answer 5

• govt spending (evaluation: deficit)
  -automatic stabilisers

Question 6

Why are there high rates of unemployment in a recession?

Answer 6

• high levels of spare capacity and a large negative output gap)