Trade cycle (the economic or business cycle)

Question 1

Trade cycle

Answer 1

Trade cycle or economic cycle, also known as a business cycle, refers
to the fluctuation of economic activity in an economy over time.
It involves alternating periods of expansion and contraction in real
economic output, employment, and other key economic indicators.
Economic cycles are characterised by several key phases:
Rapid Expansion (Boom) - Slowdown - Peak - Recession - Trough -
Economic Recovery

Question 2

Phases of the trade cycle

Answer 2

Boom – a period when the rate of growth of real GDP is fast and
higher than the long run trend
Slowdown – a weakening of the rate of growth; real GDP is still rising
but at a slower rate
Recession – a period of at least six months when an economy suffers
a fall in real GDP
Recovery – a phase after recession when real GDP starts to rise and
unemployment begins to fall
Depression – a prolonged downturn where real GDP falls by at least
10%

Question 3

Causes of a recession

Answer 3

A recession is typically marked by two consecutive quarters of negative real GDP
growth.
* Lower consumer confidence as disposable incomes decrease
* Fall in business confidence: less investment; job loss
* Higher unemployment: as businesses lay off workers, consumer confidence falls
* Negative demand/supply-side economic shocks eg a credit crunch, a sudden rise in energy
prices, a trade shock
* Poor choice of macroeconomic policy: eg too much austerity; keeping interest rates too high for
too long

Question 4

Causes of an economic slowdown

Answer 4

• Interest rate rise: central banks might respond to an increase in inflation by raising interest
  rates to cool down the economy, reduce AD growth and prevent excessive inflation.
• Tighter fiscal policy: government may put up taxes or cut public spending to improve public
  finances, reducing AD growth/
• A slowdown in global economic growth or the emergence of trade tensions can negatively
  impact a country’s exports and economic prospects.
• Global geopolitical events can slow growth.

Question 5

Causes of an economic recovery

Answer 5

An economic recovery is the phase of the business cycle that follows a recession
where national output recovers to where it was before a recession.
economic events in other countries.
* Cuts in interest rates (monetary policy): to stimulate AD
* Fiscal stimulus: such as tax cuts or an increase in government spending or borrowing
* Business and consumer confidence may increase boosting AD
* Positive demand/supply-side shock eg a fall in energy prices
* More rapid global growth: boosts exports and economic prospects

Question 6

Causes of a boom

Answer 6

A boom occurs when the economy is growing at an unsustainable rate
* Over confidence: ‘animal spirits’ cause a rapid increase in AD when there is
little/no spare capacity
* Loose fiscal and/or monetary policy; allows AD to grow too rapidly