The business cycle

Question 1

What is macroeconomics?

Answer 1

The study of the performance of the economy as a whole and the policies used to improve that performance

Question 2

What is microeconomics?

Answer 2

Studies the behaviour of individual agents

Question 3

Australia’s GDP increase (1959-2013) and annual rate

Answer 3

Australia’s GDP grew form $220 billion in 1959-60 at an average annual rate of 3.2% to reach 1600 billion in 2013-14 (a seven-fold increase)

Question 4

When were there periods of rapid growth and slow growth?

Answer 4

The economy has had periods of rapid growth (e.g. the late 1960s; 1983-1986; 1998; 2007) and slow growth (e.g. 1983; 1991; 2000; 2008)

Question 5

What is the business cycle?

Answer 5

The cycle of booms and troughs is known as the business cycle

Question 6

What are the characteristic of the business cycle?

Answer 6

• Boom
• Recession
• Trough
• Upswing

Question 7

Equation for rate of change

Answer 7

(year 1)-(year 2)/(year 1) ×100

Question 8

When do booms occur?

Answer 8

Occur when the level of economic activity is higher than normal. The level of aggregate expenditure is at, or beyond, the level required for full employment of productive resources.

Question 9

Features of a boom?

Answer 9

• A general feeling of confidence throughout the economy
• High levels of consumption expenditure, particularly on durable foods and luxuries
• High levels of profitability in the business sector
• A high level of utilisation of productive capacity, perhaps with bottlenecks in some sectors
• Relatively low cyclical unemployment
• Higher levels of labour participation in the workforce
• Inflationary pressures
• High levels of borrowing

Question 10

During the contraction phase, what to businesses sense?

Answer 10

Businesses sense that they have enough capacity to meet anticipated demand

• Further investment would carry greater risk
• The increased levels of consumer spending that drove investment and output may now result in price increases as the economy reaches capacity
• Bottlenecks (shortages of labour or productive capacity) may occur in some industries

Question 11

What happens to income, output and expenditure (contraction)

Answer 11

Increases in income, output and expenditure that characterised the boom start to level off

Question 12

What happens to confidence and expectations?

Answer 12

Slower growth in spending output and income starts to spread throughout the economy, and it feels as if the economic climate has deteriorated

These events give rise to uncertainty as consumers and firms adjust their expectations about the future and change their planned spending as a result.

Question 13

Government policy (contraction - effects)

Answer 13

• Designed to restrain high economic activity though monetary policy
• Increased interest rates discouraged borrowing and consumer spending on durable goods

Question 14

How might the downswing appear dramatic?

Answer 14

If it is accompanied by sharp declines in confidence or falling asset values

Question 15

When does a trough occur?

Answer 15

When the level of aggregate expenditure (income, consumption and investment) is below the economy’s potential

Question 16

Characteristics of a trough

Answer 16

• Higher levels of cyclical unemployment
• Reduced company profits
• Lower sales of consumer durables
• Lower levels of consumer and business confidence
• Reduced pressure on prices
• Higher savings rates
• Lower interest rates
• Lack of confidence and reluctance to spend

Question 17

Why do expansions occur?

Answer 17

Due to the fact that the economic trough cannot continue indefinitely

Question 18

What happens to productive machinery? (upswing)

Answer 18

Productive machinery is eventually worn out and replacement, bringing on new investment.
- Businesses begin to innovate with new products and more efficient processes as they try to attract buyers, and try to gain a competitive advantage over their rivals

Question 19

What happens to the level of economic activity and confidence?

Answer 19

The level of economic activity and confidence gradually rises as the economy resumes its long term growth path

Question 20

What happens to investment expenditure?

Answer 20

• Creates the capacity that firms use to produce final goods and services
• At some point, investment starts to slow because firms think the return is unlikely to justify the risk of purchasing new capital equipment

Question 21

Average lengths of the business cycle

Answer 21

The average length of a business cycle between 1960 and 2011 was 52 months.

• Average duration of the contraction period was 19 months
• Average duration of the expansion period was 32 months

Question 22

Examples of exogenous factors?

Answer 22

external factors – drought, flood or war

Question 23

What are economic indicators?

Answer 23

Economic indicators refer to data or information that helps us describe and measure the current state of the economy.

Indicators expose trends and help to forecast economic events in the future

Question 24

What is GDP?

Answer 24

The total value of new final goods and services produced in the country during the year.

Question 25

Examples of narrow indicators

Answer 25

• The consumer price index
• Average weekly earning
• Labour force and unemployment statistics
• Business spending on capital equipment

Question 26

Government institutions that publish statistics

Answer 26

• The Treasury
• Australian Bureau of Statistics
• Australian Bureau of Agricultural and Resource Economics and Sciences

Question 27

Private organisations that collect economic data

Answer 27

• Major banks
• The economic faculties of major universities
• The chamber of commerce and industry

Question 28

Types of indicators?

Answer 28

• Leading
• Coincident
• Lagging

Question 29

Leading indicators?

Answer 29

• Predict changes in economic activity

- We would expect them to change before the direction becomes evident in the rest of the economy

Question 30

Examples of leading indicators

Answer 30

• building approvals
• share prices
• levels of inventory held by firms
• employment vacancies
• levels of business confidence
• consumer sentiment

Question 31

Coincident indicators

Answer 31

• move in line with the level of economic activity

Question 32

Examples of coincident indicators

Answer 32

• manufacturing output
• production of building materials
• sales of consumer durables
• retail sales
• interest rates
• growth of real GDP

Question 33

Lagging indicators

Answer 33

• not expected to show any change until after trends in the rest of the economy have been confirmed
• react to developments that occurred sometime in the past

Question 34

Examples of lagging indicators

Answer 34

• Unemployment levels
• Savings bank deposit levels
• Consumer debt levels

Question 35

What are pro-cyclical indicators?

Answer 35

Move in the same direction as the level of economic activity such as gross domestic product

Question 36

What are counter-cyclical indicators

Answer 36

Move in the opposite direction to the economy such as unemployment levels because they rise as economic activity slows.