The Business Cycle

Question 1

What is the business cycle (draw the cycle)

Answer 1

the model economists refer to when describing short term fluctuation in economic activity

Question 2

What is the boom

Answer 2

a period when the rate of economic growth and the general level of economic activity is above average

Question 3

what are 4 characteristics of the boom (CCLI)

Answer 3

1. CONSUMPTION EXP - levels high on luxuries/durables
2. CONFIDENCE - throughout economy
3. LOW UNEMPLOYMENT
4. INFLATIONARY PRESSURE - more likely as excess demand for economic resources causes price to bid upwards

Question 4

Explain the contraction (events that cause and what happens)

Answer 4

After the boom, the rates of output and expenditure tend to level off after increasing. Profits may be squeezed by rising costs - the effect being a slow of agg output and the spread of income levels through economy = rate of growth falls

Before boom, firms invest in capital but when sales start to level off, investment return falls = risky.
Lower investment = lower ouput and income -> sales flatten as demand levels off

Question 5

explain what the contractionary economic policy is supposed to do and how it is inputted

Answer 5

to reduce the level of activity due to booms associated with rising prices, speculation and bottlenecks in supply. This means higher interest rates, taxes and reduced spending

Question 6

(contraction) What is recession, what are its effects

Answer 6

2 succesive quarters of falling real GDP/neg econ growth (unemployment)
effects: falling stock prices, banking crisis, falling asset value

Question 7

What is the trough

Answer 7

agg spending (income, consumption, ivnestment) is below that necessary to sustain average levels of econ growth

Question 8

what are 3 characteristics of the trough

Answer 8

1. slower growth rates in retail spending (esspecially durables)
2. lower levels of consumer and business confidence
3. lower company profits

Question 9

(trough) explain the expansionary policy and what it entails

Answer 9

if the economy is in a trough this policy seeks to increases the level of activity using a combo of:
lower taxes, higher gov spending, lower interest rates

Question 10

(upswing) Describe the 3 factors that bring the economy out of troughs

Answer 10

1. Capital used by firms wears out and requires replacement therefore income is cycled through economy
2. trough forces firms to be more competitive through innovation and lower costs
3. gov will input expansionary policies to stimulate production