Chapter 8- The Trade Cycle

Question 1

What are some objectives of the government economic policy:

Answer 1

economic growth, balance of trade stability, control of inflation, low unemployment

Question 2

What are some consequences of inflation?

Answer 2

Interference with the price mechanism

Industrial relations conflict

Redistribution of income and wealth

Question 3

What are the tools of government economic policy?

Answer 3

Fiscal Policy- gov policy on taxation, public borrowing and spending (manage demand)

Monetary Policy- gov policy on money supply, interest and exchange rates (manage demand)

Supply-side policy- attempt to increase level of aggregate supply by increasing efficiency, motivation or productive capacity.

Question 4

The trade cycle:

Answer 4

repeated pattern of changes in economic growth:

Recession, depression, recovery, boom

Question 5

What business decisions will be impacted by the trade cycle stages?

Answer 5

investment
pricing
recruitment
production levels

Question 6

What are the key roles of the gov during stages of the trade cycle?

Answer 6

boost demand if economy is in recession or depression

policy decisions to increase the efficiency, motivation and capacity of the economy so that it is capable of growing at a faster rate for a longer period of time.

Question 7

What is cyclical unemployment?

Answer 7

type of employment that is caused by a decline in the general level of economic activity.

Question 8

What is a deflationary gap?

Answer 8

extent to which the aggregate demand function will have to shift upward to produce the full employment level of national income.

Question 9

What is structural and frictional unemployment?

Answer 9

Structural- long-term unemployment when economy is growing at its normal rate.

Frictional- short term unemployment due to the time it takes workers to find jobs or due to seasonal factors,

Question 10

What is the demand-pull inflation?

Answer 10

inflation that is caused by general level of economic activity

Question 11

Inflationary gap:

Answer 11

when level of aggregate demand is above level needed to sustain full employment

Question 12

What is cost-push inflation?

Answer 12

if firms are forced to increase prices because of general increase in their costs

Question 13

What can cost-push inflation result from?

Answer 13

upward pressure on wages exerted by powerful unions

upward pressure on commodity prices

Fall in value of domestic exchange rate