The Business Cycle

Question 1

What is the concept of the business cycle?

Answer 1

The business cycle refers to the cycle of booms and troughs in economic activity over time.

Question 2

What are the characteristics of the phases (upswing)?

Answer 2

Increasing employment levels but may still be under full employment 
Low/ moderate inflation.
A rise in economic growth.
Wage growth.
Increased investment - more confidence.

Question 3

What are the characteristics of the phases (boom)?

Answer 3

Nearly full employment levels.
Increased inflation, higher interest rates.
High economic growth - possibly beyond a target rate.
Higher wages.
Investment steady.

Question 4

What are the characteristics of the phases (downswing)?

Answer 4

Decreasing employment/rising unemployment. 
Falling inflation.
Falling economic growth.
No/slower wage growth.
Fall in investment.

Question 5

What are the characteristics of the phases (trough)?

Answer 5

Greater levels of unemployment. 
Low inflation.
Low economic growth.
No/slower wage growth.
Low investment.

Question 6

What are the causes of a downswing/trough?

Answer 6

Economy will reach ‘full capacity’ during a boom:
High Inflation = lower purchasing power of households + competitiveness/confidence of firms = low I.
Confidence fall, I fall …

Question 7

What are the causes of an upswing/boom?

Answer 7

Business Infrastructure will be worn out - need to replace.
New I - stimulate economic growth.
Some firms innovate = increased productivity/employment.
Firms/households re-gain confidence.

Question 8

Outline the three economic indicators of the business cycle.

Answer 8

Leading: indicate the change before it happens - help predict changes in the business cycle.
Coincident: move in the line with the economy - allow us to assess current economic state.
Lagging: indicate the change after it has happened.

Question 9

How are the economic indicators related to the business cycle?

Answer 9

Leading:
Confidence: consumers and businesses
New building approvals 
Levels of firm inventory
Employment vacancies

Coincident: 
Retail sales
Interest rates
GDP growth 
Manufacturing output

Lagging: 
Consumer debt 
Unemployment 
Savings levels 
Bankruptcy

Question 10

What are some current statistical pieces on evidence upon the business cycle (i.e. GDP)?

Answer 10

-