Business Cycle

Question 1

what is the business cycle

Answer 1

The business cycle depicts the rise and fall in output (production of goods and services), over time.
Each business cycle has four phases:

Contraction
Trough
Expansion
Peak

Question 2

Traits of the peak

Answer 2

Peaks - key features
* Wages and salaries at high levels
* Business operating at
full capacity
* Sales and profits at highest levels
* Low level of unemployment

Question 3

Traits of contraction

Answer 3

Contraction - key features
* Decreasing consumer spending
* Business expectations increasingly pessimistic
* Decreasing business investment
* Sales and profits falling
* Unemployment rising

Question 4

Traits of expansion

Answer 4

Expansion
- key features
* Increasing consumer spending
* Business expectations increasingly optimistic
* Increasing business investment
* Sales and profits rising
* Unemployment falling

Question 5

traits of through

Answer 5

Troughs - key features
* Wages and salaries at low levels Business operating at below
full capacity
* Sales and profits at lowest levels
* Consumer spending at lowest level

Question 6

why is inflation important

Answer 6

It is important for the rate of inflation in an
economy to be managed. A low, steady rate of inflation is good for the economy. But if inflation is too high, the currency loses its value. If inflation increases at a very rapid rate, it is called hyperinflation.

Question 7

Influencing Interest rates and inflation

Answer 7

The Reserve Bank of Australia influences the
economy by carrying out ‘monetary policy’.
It sets the ‘cash rate’, which influences the interest
rates offered by commercial banks to their customers.

Raising or lowering interest rates can stimulate or dampen economic activity if needed, helping to achieve a low and steady inflation rate.

Question 8

Inflation and the business cycle

Answer 8

During an expansion
As consumers demand more output (goods and services), businesses produce more output to meet this increased demand, but they will eventually reach their productive capacity (their maximum level of supply). There will be more demand for their output than output available. This pulls prices up.

During a contraction
As consumers demand less, businesses produce less output. Some businesses may lower their prices or offer discounts to increase sales. This leads to lower inflation or deflation.

Question 9

How is inflation measured?

Answer 9

The most well-known indicator of inflation is from the Consumer Price Index (CPI), which measures the changes in the price of a typical basket of goods and services consumed by households. The inflation rate is the percentage change in the price of this basket over time. If the inflation rate is 3%, a ‘basket’ of goods and services that cost you $100 last year will cost you $103 this year.

Question 10

what is a boom recession and depression?

Answer 10

The business cycle can also go through more extreme phases.

A boom is a period of strong economic expansion where many businesses are operating at full capacity or above capacity, and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.

A recession is when output has fallen for a period of time and the unemployment rate increases.

A depression is a very severe recession. There is a large contraction in the economy, and the unemployment rate is likely to be at a very high level.