2.5.3 - trade/business cycle

Question 1

What is the trade/business cycle?

Answer 1

It refers to the stage of economic growth that an economy is in. The economy goes through periods of booms and downturns.

Question 2

What is a boom in the business cycle?

Answer 2

A boom is when economic growth is fast, may be inflationary or unsustainable. During these periods of economic growth, government may receive more tax revenue, due to more spending and higher incomes, and may spend less, due to less people claiming benefits.

Question 3

What is a recession in the business cycle?

Answer 3

The real output within the economy falls, there is negative economic growth. Governments may increase spending to try and stimulate growth in the economy eg. welfare payments, cutting taxes.

Question 4

What are the characteristics of a boom in the trade cycle?

Answer 4

• high rates of economic growth
• positive output gaps
• full employment
• demand-pull inflation
• high consumer and business confidence, leading to high rates of investment
• improved government budgets, due to higher tax revenues and less spending on welfare payments

Question 5

What are some characteristics of a recession in the trade cycle?

Answer 5

• negative economic growth
• lots of spare capacity, negative output gaps
• demand-deficient unemployment
• low inflation rates
• government budgets are worsened due to higher spending on welfare payments and lower tax revenues
• lower business and consumer confidence, reducing spending and investment