2.5.3 Trade (business) Cycle

Question 1

Describe the trade / business cycle diagram.

Question 2

Characteristics of a BOOM

Answer 2

• High GDP growth: Rapid economic expansion, often driven by increased demand. (Positive output gap / produces beyond PPF)
• Low unemployment: High demand for labour, leading to a tight labour market.
• Rising inflation: Demand Pull inflation.
• Increased consumer and business spending: Confidence boosts consumption and investment.

Question 3

Characteristics of a recession?

Answer 3

• Negative GDP growth: Economic output contracts for two consecutive quarters.
• Rising unemployment: Firms reduce their workforce due to falling demand.
• Falling inflation/deflation: Reduced demand causes downward pressure on prices.
• Lower consumer and business spending: People and firms cut back on spending in response to uncertainty.