Trade Cycle 2.5

Question 1

Trade Cycle Def.

Answer 1

Period Fluctuations in Economic Activity/Real GDP 4 stages: - Boom - Downturn - Recession - Recovery

Question 2

Trade Cycle Diagram

Answer 2

Question 3

Boom 4

Answer 3

GDP is at the peak of the cycle, growth above trend rate Usually a positive output gap Wages, prices, profits growing strongly - inflation Gov. finances probably show a budget surplus - increase in tax revenue, decrease on benefits Inflationary Pressure

Question 4

Downturn

Answer 4

Unemployment starts to rise + Output gap shrinks

Gov. finances worsen

Question 5

Recession

Answer 5

Where Real GDP falls for 2 consecutive quarters

Bottom of cycle

Negative output gap

high unemployment

Low inflation

Budget deficit as tax revenue falls & benefits increase

Question 6

Recovery

Answer 6

GDP starts to grow again

Negative output gap starts to shrink

Unemployment falling

Inflation starts to pick up as wages recovering

Question 7

Demand Side Shocks 5

Answer 7

a housing boom or crash (causing wealth effects)

a stock market boom or crash (causing wealth effects) a recovery or slowdown in the world economy (affecting exports)

interest rate changes (rising rates will reduce AD and vice versa)

fiscal policy changes (rising taxes and cuts in public spending will reduce AD and vice versa)

Question 8

Supply-Side Shocks 2

Answer 8

Changes in the prices of world commodities (i.e. a rise in oil prices will reduce SRAS and hence equilibrium output, and vice versa)

Industrial disputes could lead to wage increases and cost-push inflation, and vice versa.