Economic Cycle Flashcards
What is the economic cycle?
Economic cycle or trade cycle, also known as a business cycle, refers
to the fluctuation of economic activity in an economy over time.
What is a boom?
a period when the rate of growth of real GDP is fast and
higher than the long run trend
What is a slowdown?
a weakening of the rate of growth; real GDP is still rising
but at a slower rate
What is a recession?
a period of at least six months* when an economy suffers a fall in real GDP
- two successive quarters
What is the recovery section of an economic cycle?
a phase after recession when real GDP starts to rise and
unemployment begins to fall
What is the depression stage of an economic cycle?
a prolonged downturn where real GDP falls by at least
10%
Causes of an economic slowdown?
• Interest rate rise
- central banks might respond to an increase in inflation by raising interest rates to cool down the economy, reduce AD growth and prevent excessive inflation.
• Tighter fiscal policy
- government may put up taxes or cut public spending to improve public finances, reducing AD growth
• A slowdown in global economic growth or the emergence of trade tensions can negatively
impact a country’s exports and economic prospects
• Global geopolitical events can slow growth
Causes of a recession?
• Lower consumer confidence as disposable incomes decrease
• Fall in business confidence: less investment; job loss
• Higher unemployment: as businesses lay off workers, consumer confidence falls
• Negative demand/supply-side economic shocks – e.g. a credit crunch, a sudden rise in energy
prices, a trade shock
• Poor choice of macroeconomic policy: e.g. Too much austerity; keeping interest rates too high
for too long
Causes of an economic recovery?
• Cuts in interest rates (monetary policy): to stimulate AD
• Fiscal stimulus: such as tax cuts or an increase in government spending or borrowing
• Business and consumer confidence may increase boosting AD
• Positive demand/supply-side shock – e.g. a fall in energy prices
• More rapid global growth: boosts exports and economic prospects
Causes of a boom?
A boom occurs when the economy is growing at an unsustainable rate
• Over confidence: ‘animal spirits’ cause a rapid increase in AD when there is little/no spare capacity
• Loose fiscal and/or monetary policy; allows AD to grow too rapidly
Features of a recession?
Falling real GDP: a sustained decline in a country’s GDP over at least
two consecutive quarters (six months). Economic output shrinks as businesses produce less, consumers spend less, and investment declines.
Rising unemployment: businesses reduce production and cut back
on hiring, leading to job losses and a rise in cyclical unemployment.
Disinflation: falling demand and a weaker labour market often leads
– perhaps with a time lag – to a reduction in the rate of price
inflation.
Reduced business investment: businesses tend to scale back their
investment during a recession because of weak or falling demand.
Risk to government finances: government borrowing and national
debt may rise as government spends to support the economy.
