the economic cycle

Question 1

What is the economic cycle?

Answer 1

Refers to stages of economic prosperity and decline.

Question 2

Which stages of the economic cycle are inflationary?

Answer 2

Booms and recoveries.

Question 3

Which stages of the economic cycle are accompanied by government spending?

Answer 3

Recessions and Slumps.

Question 4

What stage of the economic cycle would tax revenue be the highest, and why?

Answer 4

Booms.

Aggregate demand is high, firms produce more units of output so pay more corporation tax, and consumers earn higher wages so pay more income tax.

Question 5

When do consumers and firms have the lowest levels of confidence?

Answer 5

During economic slumps.

Question 6

Name the 3 injections and 3 withdrawals to the circular flow of income.

Answer 6

Injections: exports, investment, government spending

Withdrawals: imports, savings, taxes

Question 7

When does the economy reach a state of equilibrium?

Answer 7

When the rate of withdrawals = the rate of injections

Question 8

Income = ? = ?

Answer 8

Income = Output =Expenditure

Question 9

List the components of aggregate demand.

Answer 9

Consumer Spending
Investment
Government Spending
Exports - imports

Question 10

What is the largest component of aggregate demand?

Answer 10

Consumer spending.

Question 11

Define disposable income

Answer 11

Income left over for consumers to spend once taxes have been deducted.

Question 12

How do low interest rates encourage more consumer spending?

Answer 12

Low interest rates make it cheaper to borrow money and discourage saving.

They also lower the cost of variable rate mortgages, increasing disposable income.

Question 13

How do business confidence and capital investment correlate?

Answer 13

As confidence increases, so does capital investment.

Question 14

Is fiscal policy demand-side or supply-side?

Answer 14

Demand-side.

Question 15

When would the government initiate contractionary fiscal policy?

Answer 15

During economic booms, in order to ease inflationary pressures and prevent any periods of economic instability.

Question 16

What is fiscal policy?

Answer 16

A government’s use of spending and taxation in order to influence a country’s economy.

Question 17

How would the exchange rate affect the current account deficit?

Answer 17

A depreciation of the pound makes imports expensive and exports cheap, thus narrowing the deficit and boosting economic growth.

Question 18

How could the government intervene to reduce the current account deficit?

Answer 18

By adopting protectionist measures, whereby tariffs against imports increase and British firms are subsidised to improve their competitiveness.

Question 19

List 4 factors affecting aggregate supply.

Answer 19

• Cost of employment
• Cost of raw materials
• Government regulation
• Migration

Question 20

Which way would the aggregate supply curve shift given an increase in taxes?

Answer 20

Shift to the left (decrease in supply).

Question 21

Define inflation.

Answer 21

A persistent increase in the general price level of goods/services over a period of time.

Question 22

How does deflation differ from disinflation?

Answer 22

Deflation is a fall in the general price level, whereas disinflation is a fall in the rate of inflation.

Question 23

What is the target inflation rate in the UK?

Answer 23

2%.

Question 24

Briefly describe the Consumer Price Index.

Answer 24

A survey is used to find a weighted basket of goods. The prices of these goods are measured and updated annually.

Question 25

How does the Retail Price Index differ from the CPI?

Answer 25

RPI includes housing costs and therefore generally has a higher value than the than the CPI.

Question 26

Describe the difference between nominal values and real values.

Answer 26

Real values take into account the rate of inflation.

Question 27

What type of inflation is caused by exchange rate depreciation?

Answer 27

Demand-pull inflation.

Question 28

When does cost-push inflation occur?

Answer 28

During an inward shift of aggregate supply whereby firms face higher costs.

Question 29

What type of inflation occurs when workers demand higher wages?

Answer 29

Cost-push inflation.

Question 30

How does inflation benefit those in debt?

Answer 30

The value of debt erodes over time with inflation, so consumers don’t have to pay back as much

Question 31

How would inflation be a burden on firm?

Answer 31

Workers would see their real income erode when accounting for inflation, therefore they would demand higher wages which increases costs for firms.

Question 32

How does someone unemployed differ from someone economically inactive?

Answer 32

Unemployed are those who are able to work and actively seeking a job, whereas those economically inactive choose to remain out of a job.

Question 33

Briefly describe structural unemployment.

Answer 33

Occurs when there is a mismatch between skills provided and skills required.

Question 34

When does cyclical unemployment occur?

Answer 34

When there is a lack of demand in an industry or the economy.