The Business Cycle

Question 1

Downturn / contraction

Answer 1

A decline in economic activity

Question 2

Upturn / expansion

Answer 2

An increase in economic activity

Question 3

Expectations

Answer 3

Beliefs about what will happen in the future

Question 4

Consumption

Answer 4

Purchasing and using goods and services

Question 5

Balance of payments

Answer 5

The difference between the funds country earns and those it pays for all international transactions

Question 6

Gross domestic product

Answer 6

The total market value of all goods and services produced in a country during a given period

It counts all of the output generated within the borders of a country or a region.

Question 7

Supply and demand

Answer 7

The willingness and ability of consumers to purchase goods and services
The willingness and ability of businesses to offer goods and services for sale

Question 8

The business cycle/ trade cycle

Answer 8

shows how a nation’s real GDP fluctuates over time

Question 9

A boom

Answer 9

A long period of expansion

Question 10

A recession

Answer 10

A downturn that lasts more than 6 months

2 or more consequtive quarters of negative economic
growth

Question 11

a depression or slump

Answer 11

A downturn that lasts for a year or 2

Question 12

a peak

Answer 12

The highest point on a business cycle

Question 13

a trough / bottom out

Answer 13

The lowest point on the business cycle

Question 14

What is a negative growth

Answer 14

Contraction/decline

Question 15

NBER

Answer 15

National Bureau of Economic Research

Question 16

4 phases of business cycle

Answer 16

1 peak (boom)
2 recession (depression)
3 trough
4 recovery - expansion

Question 17

economic trends in recession (4)

Answer 17

– Consumer spending slows
– Inventories build up
– Companies reduce output & layoff employees
– Unemployment rises

Question 18

economic trends during a recovery (5)

Answer 18

– Activity accelerates
– Consumer spending improves
– New orders are placed
– Companies increase output & add employees
– Unemployment declines

Question 19

RECESSION 7

Answer 19

businesses make fewer sales
companies earn less revenue
businesses cut back on output
The number of people on payrolls is reduced
unemployment rate goes up
eventually* GDP reaches a trough
consumers spend less money

Question 20

EXPANSION 6

Answer 20

economic activity picks up again
excess inventories are used up
production is ramped up again
job opportunities improve
new orders are placed
sales improve

Question 21

WHAT CAUSES EXPANSION?

Answer 21

1. PEOPLE’S SPENDING = CONSUMPTION DECISIONS
   = decisions on whether to spend, save, borrow…
2. SUPPLY AND DEMAND
3. AVAILABILITY OF CAPITAL

Question 22

WHAT CAUSES DOWNTURNS?

Answer 22

Demand higher than supply
-economy is overheating - inflation (rise in prices)

Spending goes down – production goes down – lay offs

People start saving and spending less

Question 23

TWO THEORIES OF THE BUSINESS CYCLE:
THEY EXPLAIN WHAT CAN CAUSE THE BUSINESS CYCLE

Answer 23

INTERNAL (ENDOGENOUS) THEORY
Causes are in the economic activity

EXTERNAL (EXOGENOUS) THEORY

Causes are outside economic activity wars, unrest, elections, political shocks natural disasters
demographic changes
scientific and technological advances