2.5.3 - Trade (business cycle)

Question 1

What is trade (business) cycle ?

Answer 1

• The business cycle refers to the fluctuations in economic activity that an economy experiences over time.

Question 2

B) Characteristics of a boom

Answer 2

A boom is a period of rapid economic expansion resulting in higher GDP, lower unemployment, a higher inflation rate and rising asset prices. Demand pull inflation.

Question 3

C) Characteristics of a recession

Answer 3

Negative economic growth for two consecutive quarters (6months).
Features of a recession include:
- higher unemployment,
- lower living standards.
- increase in government borrowing e.g benefits and universal credit
- often falling asset prices (e.g. falling house prices)

Question 4

Example of economic booms

Answer 4

• Lawson boom 1980s caused by rising house prices, tax cuts(reduced the basic rate of income tax from 29% to 25%), lower interest rates and high confidence.
  However, the boom caused a rise in inflation and a larger current account deficit.

Question 5

Examples of economic recessions

Answer 5

• During 1980-81, the UK entered a recession – with falling output, rising unemployment and a fall in the inflation rate. The recession particularly hit manufacturing sector. The recession was caused by high-interest rates, an appreciation in Sterling and tight fiscal policy.