Ch 8: The Business Cycle

Question 1

What are features of the boom phase of the business cycle?

Answer 1

BOOM - period when the rate of economic growth and general economic activity is above average

• high levels of consumption expenditure, esp. on durables and luxuries
• general feeling confidence in the economy
• profit share of GDP rises (businesses in general are profitable)
• firms may have little excess capacity
• cyclical unemployment is relatively low (unemployment decreases as economic activity rises)
• participation rates of labour are usually at their highest
• inflationary pressure is more likely, greater demand for product market and subsequently factor market which leads to higher prices
• imporst increase
• level of borrowing may be high, even if interst rates have risen due to the level of economic confidence that prevails

Question 2

What are features of the recession/contraction phase of the business cycle?

Answer 2

RECESSION (not technical definition of recession), a slowing of economic activity which leads to slowing of economic growth (really bad is 1%)

• unemployment starts to rise (cyclical)
• inflationary pressures lessen
• investment starts to fall

Question 3

What are features of the trough phase of the business cycle?

Answer 3

TROUGH - level of aggregate spending is below economy’s potential

• higher levels of cyclical unemployment
• lower levels of company profits
• slower growth rates of consumer spending - reduction in sales of durables
• lower levels of consumer and business confidence
• the prices of some goods may fall - wages may fall i.e. contracts (mining)
• levels of saving may rise as some put off consumption decisions (espically if their job is at risk)

Question 4

How does the upswing/expandion phase of the business cycle come about?

Answer 4

a trough does not continue, one reason isthat productive capital is eventualy worn out and requires replacement. A ‘multiplier effect/ will apply to this investment, creating more jobs and income

Question 5

What are leading indicators?

Answer 5

LEADING INDICATORS: predict trends in economic activity, changing before a direction becomes evident in the rest of the economy

i.e.

• building approvals
• levels of stock (inventory) held by retail rifms
• manufacturers’ new orders
• consumption expectations

Question 6

What are coincident indicators?

Answer 6

COINCIDENT INDICATORS: appear to move in line with the level of economic activity

i.e.

• manufacturing output
• sale of consumer durables
• production of building materials
• cement production
• retail sales
• job advertisments
• overtime worked
• consumer prices
• motor vehicle sales
• money supply
• capacity utilisation

Question 7

What are lagging indicators?

Answer 7

LAGGING INDIVATORS: not expected to show any change until after trends in the rest of the economy have been confirmed, lagging indicators react to developments that occurred some time in the past

i.e.

• interest rates (prime rates)
• consumer debt
• duration of unemployment
• bankruptcies
• CPI

Question 8

What are exogenous factors?

Answer 8

they influence the cylical pattern i.e. dorught, flood, war