Trade Cycle

Question 1

Define Boom

Answer 1

A period when the rate of growth of real GDP is fast and higher than the long-term trend

Question 2

Define Depression

Answer 2

A prolonged and persistent downturn and where a nations GDP falls by at least 10%

Question 3

Define Recovery

Answer 3

A phase after a recession - Real GDP starts to increase from the trough and unemployment eventually begins to fall

Question 4

Define Slowdown

Answer 4

A weakening of the rate of the growth

Real GDP is still rising but increasing at a slower rate

Question 5

What happens to per capita incomes during a boom and recession

Answer 5

Per capita income rises - Boom

Per capita incomes fall - Recession

Question 6

What happens to confidence during a boom and recession

Answer 6

Rising household and business confidence - Boom

Falling house pools and business confidence - Recession

Question 7

What happens to jobs during a boom and recession

Answer 7

Rising employment, falling unemployment since labour is a derived demand (more workers needed) - Boom

Falling employment, rising unemployment, potentially rising underemployment- Recession

Question 8

What happens to real wages during a boom and recession

Answer 8

Rising wages, especially during skilled labour shortages - Boom

Falling real wages - Recession

Question 9

What happens to inflationary pressure during a boom and recession

Answer 9

Rising demand-pull and cost-push inflationary pressure due to positive output gaps - Boom

Falling inflationary pressure, risk of price deflation - Recession

Question 10

What happens to business profits during a boom and recession

Answer 10

Rising business profits (unless an inferior good is being sold) - Boom

Falling business profits (unless an inferior good is being sold) - Recession

Question 11

What happens to trade balance during a boom and recession

Answer 11

Rising deficit, demand for imported goods and services expand - Boom

Falling deficit as demand for imports contracts - Recession

Question 12

What happens to spare capacity during a boom and recession

Answer 12

Increasing use of scarce resources, takes economy closer to PPF - Boom

Less use of scarce resources- Recession

Question 13

What happens to planned business investment during a boom and recession

Answer 13

Rising investment, accelerator effect may cause business capital investment to rise more quickly than GDP - Boom

Falling investment, accelerator effect causes investment to fall more sharply than GDP, more spare capacity and less profit - Recession

Question 14

What happens to the Construction Industry during a boom and recession

Answer 14

Rise in construction output - Boom

Fall in construction output - Recession

Question 15

What happens to government fiscal balance during a boom and recession

Answer 15

Falling budget deficit - Boom

Rising budget deficit - Recession

Question 16

Possible Causes of Recession

Answer 16

External Events or Shocks

Tightening of monetary and/or fiscal policy

Fall in asset prices or supply of credit

Drop in animal spirits

Question 17

How does an inward shift of AD lead to recession

Answer 17

AD has decreased - increase in spare capacity

Rising negative output gap - Fall in real GDP

Question 18

How does an inward shift of AS lead to a recession

Answer 18

Supply shock - Inward shift of SRAS

Question 19

Short term effects of recession

Answer 19

Falling demand - Business fail and profits fall

Planned investment declines

Decline in AD leads to fall in AD for labour - leads to contraction in unemployment

Decline in direct and indirect tax revenues - more welfare spending - increase in budget deficit

Deflation - price discounts due to falling demand

Question 20

Long term effects of a recession

Answer 20

Rising structural long term unemployment- risk of regional economic decline

Low rates of investment reduces size of capital stock

Ageing capital inputs - negative impact on the growth of labour productivity

Question 21

Difference between recession and depression

Answer 21

Depression is much longer and has a much more severe fall in output and employment than a recession

Question 22

What happens during a boom

Answer 22

National income is high

Economy will be working beyond full employment

Consumption and investment expenditure will be high

Tax revenue will be high

Wages and profits increase

High imports

Inflationary Pressures

Question 23

What happens during downturn

Answer 23

Output and income fall

Consumption and investment fall

Tax revenues fall

Government expenditure rise

Wage demands moderate as unemployment rises

Imports decline

Inflationary pressure ease

Question 24

What happens during recession or depression

Answer 24

Economic activity is at a low

High unemployment

Consumption is low

Investment is low

Imports will be low

Few inflationary pressures

Prices may be falling

Question 25

What happens during recovery

Answer 25

National income and output increase

Unemployment falls

Consumption rises

Investment rises

Imports rise

Wages increase

Inflationary pressures start to mount

Question 26

What are the 2 types of reasons why short run rate of growth and real GDP may fluctuate around its long term trend

Answer 26

Demand side shocks

Supply side shocks

Question 27

What are demand side shocks

Answer 27

Shocks which affect AD

Question 28

What are supply side shocks

Answer 28

Shocks which affect AS