7.5a Economy - Macroeconomics and the Business Cycle

Question 1

Economic influences

Answer 1

• Macroeconomics
• Interest rates
• Exchange rates
• Inflation

Question 2

Microeconomics definition

Answer 2

The study of smaller individual parts of the economy

Question 3

Macroeconomics definition

Answer 3

The study of the whole economy

Question 4

Aggregate demand definition

Answer 4

The total demand of an economy

Question 5

Aggregate demand formula

Answer 5

Aggregate demand = Consumption (all consumer spending) + Investment (all business spending) + Government spending + Balance of payments (exports - imports)
AD = C + I + G + (X - M)

Question 6

What happens if any of C, I, G or X go up?

Answer 6

Aggregate demand will rise because people will have more money to spend

Question 7

What will a rise in aggregate demand be shown as?

Answer 7

A rise in national income

Question 8

Ways in which money can be withdrawn from the circular flow of income

Answer 8

• People save their money (S)
• People have to pay tax to the government (T)
• Businesses / consumers may import products from abroad (M)

Question 9

What happens if S, T or M increase and why?

Answer 9

Aggregate demand will fall because people have less money to spend

Question 10

What will a fall in aggregate demand be shown as?

Answer 10

A fall in national income

Question 11

How can the effects of S, T or M increasing be balanced out?

Answer 11

• Banks use savings (S) to invest (I)
• The government uses tax (T) to spend on the country (G)
• Money spent on imports (M) us used for other countries to buy UK exports (X)

Question 12

What is another measure of national output

Answer 12

Gross domestic product

Question 13

What happens when aggregate demand rises?

Answer 13

GDP rises / the economy improves

Question 14

Why is a rise in GDP an opportunity for businesses?

Answer 14

• Increase in consumption
• Increase in investment
• Fall in saving
• Increase in government spending
• Fall in taxation
• Increase in exports
• Fall in imports

Question 15

What happens when aggregate demand falls?

Answer 15

GDP falls / the economy worsens

Question 16

Why is a fall in GDP a threat for businesses?

Answer 16

• Fall in consumption
• Fall in investment
• Rise in saving
• Fall in government spending
• Rise in taxation
• Decrease in exports
• Increase in imports

Question 17

GDP definition

Answer 17

A measure of the total output of a country’s economy over a year

Question 18

What is the measurement of GDP?

Answer 18

Where aggregate demand = aggregate supply

Question 19

What can GDP be used to judge?

Answer 19

Where a country is on the business cycle

Question 20

When does a recession occur?

Answer 20

`When there is a fall in economic growth for two consecutive quarters

Question 21

What are the implications of a recession?

Answer 21

• Demand is lower than supply so prices fall to encourage sales
• Fall in investment
• Lower savings
• Less consumer spending

Question 22

Strategies a business could put in place to help it through a recession:

Answer 22

• Reduce prices
• Reduce fixed costs
• Sell assets
• Close branches

Question 23

Implications of a slump/trough:

Answer 23

• Less needs to be produced so factories/branches and possibly businesses are closed so unemployment increases
• Deflation may occur

Question 24

Deflation definition

Answer 24

A long-term, sustained fall in prices

Question 25

Implications of a boom/peak:

Answer 25

• Demand is greater than supply
• Possible increase in prices
• Businesses may expand
• High profits
• Limited resources

Question 26

Strategies a business could put into place to help it benefit from a boom:

Answer 26

• Increase prices
• Release ‘luxury’ products for those with more disposable incomes
• Increase capacity
• Improve current assets

Question 27

Implications of recovery/growth/expansion:

Answer 27

• Increase in demand
• Increase in profits
• Growth of new and existing businesses
• Possible shortages of factors of production

Question 28

What does the growth potential of a country depend on?

Answer 28

Amount and quality of economic resources e.g. labour and fixed assets

Question 29

What influences the extent to which a business in affected by the business cycle?

Answer 29

The income elasticity of demand for their products