business cycle

Question 1

definition of the business cycle

Answer 1

the business cycle is a regular oscillation of economic activity.

Question 2

what happens in a boom?

Answer 2

high confidence, construction, interest rates, consumption, investment, profitibility, inflation, durables, imports, wages and employment but low savings and inventories

Question 3

what happens in a downswing?

Answer 3

rising interest rates, low consumption and investment, uncertainty, lower employment and wages, high production costs, debt, inflation, low govt spending, decrease in confidence

Question 4

what happens in a trough?

Answer 4

high unemployment, low confidence, low investment, low consumption, low interest rates, hgh savings, low inflation, low demand for labour, negative GDP growth, low govt rev

Question 5

what happens in an upswing?

Answer 5

low interest rates, increasing investment and consumption, expansionary fiscal policy, less debt, discounts, increasing confidence, higher share prices, construction

Question 6

what are leading indicators?

Answer 6

indicate changes before they happen

Question 7

what are coincident indicators?

Answer 7

indicates what is happening in the economy currently

Question 8

what are lagging indicators?

Answer 8

indicate changes after an economic trend has been established

Question 9

what are the two approaches to measuring GDP?

Answer 9

income and earnings approach and the expenditure approach

Question 10

what is the income and earnings approach?

Answer 10

where all incomes are added, allowing for depreciation of capital equipment and net indirect taxes

Question 11

what is the expenditure approach?

Answer 11

measuring using this apprach involves measuring the total expenditure on final goods and services produced by the four major sectors of the economy

Question 12

defintion of aggregate expenditure

Answer 12

the total amount that firms and households plan to spend on goods and services at each level of income

Question 13

what is the aggregate expenditure equation?

Answer 13

AE = C + I + G + (X-M)

Question 14

what are the four components of aggregate expentiture?

Answer 14

consumption
investment
government expenditure
net exports

Question 15

how does disposable income effect consumption?

Answer 15

there is a positive relationship

Question 16

how does interest rates effect consumption?

Answer 16

low interest rates have a positive effect as less repayments and opportunity cost of spending decreases but high interest rates cause a pause in consumption

Question 17

how does household stock of wealth effect consumption?

Answer 17

feel wealthier when their assests rise so they spend more

Question 18

how do expectations effect consumption?

Answer 18

expectations are positive or negative sentiments people have about the future state of the economy and depending on their expectations they will spend or not

Question 19

how does government policy effect consumption?

Answer 19

• monetary policy impacts interest rates, fiscal policy impacts spending decisions (taxation and govt spending)

Question 20

how does interest rates effect investment?

Answer 20

there is an inverse relationship

Question 21

how does profitability effect investment?

Answer 21

when profits are low firms may run down their capital over a longer period of time, when profits are high they have more to spend

Question 22

how do business expectations effect investment?

Answer 22

if expectations are positive they will invest more, if not they will invest less

Question 23

how do government policies effect investment?

Answer 23

monetary policy influences interest, fiscal policy impacts company tax

Question 24

how does stabilisation of macroeconomic fluctuations effect government expenditure?

Answer 24

the govt takes considerable long term investment in infrastructure but it would be inappropriate to undertake one if the economy was at full capacity but if it was in a recession it would increase employment

Question 25

how do domestic levels of economic activity effect net exports?

Answer 25

influences australia’s propensity to import. they are relatively elastic

Question 26

how does the exchange rate effect net exports?

Answer 26

if the AUD appreciates we can purchase more from overseas but if our exports become more expensive then exports will fall

Question 27

how does the terms of trade effect net exports?

Answer 27

growth of china and india has caused demand for commodities to increase, boosting export prices but imports have fallen