Business Cycles

Question 1

What is a business cycle

Answer 1

The recurrent but not periodic pattern of expansion and contraction in the level of economic activity that occurs within a country

Question 2

What are the characteristics of a recovery phase of a business cycle (4)

Answer 2

Starts once a trough is reached and economic activity starts to increase
Greater demand for goods and services
More jobs are created
Business confidence rises and there is increased spending

Question 3

What are the characteristics of a prosperity phase (6)

Answer 3

Great degree of optimism in the economy
Bank credit is extended so entrepreneurs borrow more money
Employment levels rise, salaries rise and spending increases
Imports increase
A peak is reached
Larger amount of money in circulation and this leads to an inflationary situation and eventually leads to a recession

Question 4

What are the characteristics of a recession (7)

Answer 4

Negative economic growth for 2 consecutive quarters
Introduced by a decrease in profits of businesses as a result of inflation and over production
Firms cut back on employment since fewer goods and services are produced
Unemployment increasing causes a feeling of pessimism
Income and spending decreases
Decrease in economic activity, economy slows down, GDP decreases
Households and firms obtain less credit and loans from banks

Question 5

What are the characteristics of a depression (6)

Answer 5

Money is in short supply
Negative impact on investment spending
Economic activity is at its lowest
Competition for employment opportunities
Cost of production decreases
Encourages foreign trade and leads to a recovery

Question 6

How is an actual business cycle obtained

Answer 6

When the effects of irregular events, seasons and long-term growth trend are removed from the time series data

Question 7

What are the two explanations for business cycles

Answer 7

Endogenous and Exogenous

Question 8

What is the exogenous explanation (5)

Answer 8

Also known as sunspot theory
Believe markets are inherently stable
Deviations from equilibrium state are caused by external factors
When disequilibrium exists, supply and demand kick in and bring the economy back to its equilibrium
Government should not interfere

Question 9

What are the 5 causes of economic fluctuations

Answer 9

Inappropriate government policies
Undesirable increases and decreases in money supply
Weather conditions
Shocks - e.g. war
Structural changes in the economy e.g. Electronic development

Question 10

What is the endogenous explanation (7)

Answer 10

Also known as Keynesian approach or Interventionalism
Believe markets are inherently unstable
Economic activity is continually above or below its potential
Price mechanism fails to co-ordinate demand and supply
Prices are not flexible enough
Business cycle is an inherent feature
Governments must intervene to smoothen the peaks and troughs as far as possible - Via monetary and fiscal policies

Question 11

What are the 5 types of business cycles

Answer 11

Business
Kitchin
Jugler
Kuznets
Kontratieff

Question 12

How long are business cycles and what causes them

Answer 12

+- 60 months
Major sectors of the economy moving up and down more or less together

Question 13

How long are Kitchin cycles and what causes them

Answer 13

3 - 5 years
Happen because businesses adapt their inventory levels

Question 14

How long are Jugler cycles and what causes them

Answer 14

7 - 11 years
Caused by changes in net investments by businesses and government

Question 15

How long are Kuznets cycles and what causes them

Answer 15

15 - 20 years
Caused by changes in the building and construction industries
Also called building cycles

Question 16

How long are Kontratieff cycles and what causes them

Answer 16

50 years and longer
Caused by technological innovation, war and discoveries of new deposits

Question 17

What are the 2 methods of smoothing out business cycles

Answer 17

Stimulating private sector
Reducing private sector demand

Question 18

What are the 3 options that can lead to an increase in total spending and therefore increase demand

Answer 18

Decrease Taxation
Increase Government spending
Increased government spending and decreasing taxes simultaneously

Question 19

What is the indicator for private sector demand becoming too low

Answer 19

An increase in unemployment

Question 20

What is the indicator of private sector demand becoming too high

Answer 20

Inflation increasing

Question 21

What are the 3 ways in which government can decrease spending and decrease demand

Answer 21

Reduce Spending
Increase Taxation
Reduce spending and increase taxation simultaneously

Question 22

What does monetary policy do

Answer 22

Uses interest rates and money supply to expand or contract aggregate demand

Question 23

What are the 4 monetary policy instruments (Read explanations on page 29)

Answer 23

Interest Rates
Cash reserve requirements
Open market transactions
Moral Suasion

Question 24

What is the New Economic Paradigm

Answer 24

Demand-side and Supply-side policies

Question 25

What are the 3 bottle necks of Demand-side policy

Answer 25

Inflation
balance of payment deficits
shortages of skilled labour

Question 26

Read Pages 30 - 33 to learn graphs

Question 27

What does the Philips curve illustrate

Answer 27

The relationship between unemployment and inflation

Question 28

What are the 3 parts of supply-side policy

Answer 28

Reduction of cost
Improving the efficiency of inputs
Improving the efficiency in markets

Question 29

What are the 3 factors of reduction of cost

Answer 29

Infrastructure services - Supplied by government
Administrative cost - Inspections, regulations etc. all contribute to cost
Cash incentives - Subsidies can assist businesses

Question 30

What are the 4 factors of improving the efficiency of inputs

Answer 30

Tax Rates - Decreasing rates
Capital Consumption - Replacing capital goods
Human Resources - Quality of labour
Free advisory services - Services that promote exports

Question 31

What are the 3 factors of improving the efficiency in markets

Answer 31

Deregulation - Making markets freer by removing laws
Competition - Creates new businesses
Levelling of the playing fields - Privatisation because public sector has advantage

Question 32

Look at page 33 for effects of supply-side and demand-side

Question 33

What is forecasting

Answer 33

The process of making predictions about changing conditions and future events that may significantly affect the economy

Question 34

What are the four types of indicators

Answer 34

Leading
Lagging
Co-incidental
Composite

Question 35

What are leading indicators

Answer 35

Indicators that change before the economy
Indicate where the economy might head
E.g. Job advertising space

Question 36

What are lagging indicators

Answer 36

They change direction after the business cycle
Confirm the behaviour of co-incident indicators
E.g. Investment in capital goods

Question 37

What are co-incidental indicators

Answer 37

They move at the same time as the economy
Indicates the actual state of the economy
E.g. Value of retail sales

Question 38

What are composite indicators

Answer 38

The grouping of various indicators of the same type into a single value
The single figure forms the number of years it takes for the economy to get from one peak to the next (The length of the cycle)

Question 39

What do longer and shorter cycles indicate

Answer 39

Longer - Strength
Shorter - Weakness

Question 40

How do cycles overshoot

Answer 40

When activity in terms of composite indicators increases beyond its normal level

Question 41

What is extrapolation

Answer 41

When forecasters use past data to make predictions about the future
E.g. Predicting that a trend will continue as it did in the past

Question 42

What is a moving average

Answer 42

A statistical analysis tool that is used to analyse the changes that occur in a series of data over a certain period