Economic Cycle

Question 1

Characteristics of a boom

Answer 1

High consumption
High demand for capital goods
High employment and real wages
High demand for imports
High tax revenue 
High inflationary pressure

Question 2

Characteristics of recession

Answer 2

Rising unemployment
Rising business failure
Shortage of investment and profits
Declining confidence
Excess stock + heavy de-stocking

Question 3

4 Recovery policies

Answer 3

Cut IR
high government borrowing
QE
Expand money supply

Question 4

Causes of cycle

Answer 4

Speculative bubbles 
Changes in inventories
Political motives
External shocks
Multiplier/accelerator effect

Question 5

Speculative bubbles?

Answer 5

Spikes in asset prices caused by exaggerated expectations

Question 6

Changes in inventories?

Answer 6

Demand growing below expectations can create excess stock causing firms to cut output below initial demand fall and prices to deflate

Question 7

Political parties?

Answer 7

Can engineer a boom (1980 Lawson Boom created by low IR and ER)

Question 8

External shocks?

Answer 8

Demand or supply side factor can have knock on effect

Question 9

Multiplier/Accelerator?

Answer 9

Can lead to rapid recovery, speculation or changes in inventories

Question 10

Demand side shocks

Answer 10

Household spending shocks
Credit liquidity availability shocks
Wealth shocks
Investment spending shocks
Government finance shocks (Iraq war)
Export/import shock
Policy shocks

Question 11

Causes of growth

Answer 11

Technology/innovation
Specialisation + productivity increases
Increased labour force
Raw material discovery

Question 12

Causes of decline

Answer 12

Resources run out
Low investment
Natural disaster
Erosion of infastructure

Question 13

Government controls on growth

Answer 13

Monetary policy
Fiscal policy
Supply-side policy

Question 14

Benefits of growth

Answer 14

Higher incomes
Tax revenue 
Employment
Less government borrowing
Better public services
Money spent on environment + correcting negative externalities

Question 15

Consequences of growth

Answer 15

Inflation
Current account deficit
Environmental costs
Boom bust cycles
Inequalities

Question 16

Supply side shocks

Answer 16

Wage levels (Minimum wage rise to £7.20)
Commodity prices (Oil price drops)
Taxation
Subsidies
Invention and innovation
Labour migration (migration crisis)