Economic cycle pt2

Question 1

What causes an economic recovery?

Answer 1

-Cuts in interest rates (To increase inflation-Monetary policy)
-One or more types of fiscal policies
-A rebound in business and consumer confidence

Question 2

Demand side shocks

Answer 2

Anything that causes a sudden or considerable shift in the pattern of spending. E.g. A financial crisis can reduce business and consumer confidence and can lead to a sharp decline in spending.

Question 3

Supply side shocks

Answer 3

An unexpected event that suddenly changes the supply of something, resulting in a change in price. E.g. unexpected price in commodity prices.

Question 4

Macro impact of an economic boom

Answer 4

-Falling cyclical unemployment
-Boom in consumption can drive higher business investment via a positive accelerator effect
-Increasing tax revenues for the government helping to reduce a fiscal deficit
-Increase in a country’s trade deficit if the boom leads to a surge in import demand
-Risk of cost push and demand pull inflation as the output gap becomes positive with supply constraints

Question 5

How do economic booms come to an end?

Answer 5

-Rising inflation leads to a tighter monetary policy-higher interest curbs spending and increases saving
-If prices rise faster than incomes, spending power drops
-Rising costs causes a decline in business confidence and capital investment
-Banks may become reluctant to lend