Ch 7: Business Cycle

Question 1

What is macroeconomics?

Answer 1

study of the performance of the economy as a whole and the policies used to improve that performance

Question 2

What is the business cycle?

Answer 2

regualr oscillation of economic activity

Question 3

What is a boom?

Answer 3

definition: occurs when the level of economic activity is higher than normal, the level of AE is at, or beyond, the level required for full employment of productive resources

Features

• general feeling of confidence throughout the economy
• high levels of consumption expenditure esp. durable goods and luxuries
• high levels of profitability in the business sector
• high level of utilisation of productive capacity, perhaps with bottlenecks in some sectors
• relatively low cyclical unemployment
• higher levels of labour participation in the workforce
• upward pressure on price levels of final and factor markets
• high levels of borrowing

Question 4

What is a contraction/recession?

Answer 4

definition: slowing of economic growth

Causes

• leading to a boom, investment in infrastructure and capital equipment productive capacity which works as long as there is sufficient demand to purchase goods and services provided
• at some point, businesses sense they have enough capacity to meet anticipated demand, which means further investment would carry greater risk
• the increased levels of consumer spending that drove investment and output may now result in prices increases as the economy reaches capacity. Bottlenecks (shortages of labour/productive capacity) may occur in some industries
• at the peak of the cycle, the increases of income, output and expenditure that characterised the boom start to level off. Slower growth in spending, output and income start to spread throughout the economy and it feels as if the economic climate has deteriorated. These events give rise to uncertainty as consumers and firms adjust their expectations about the future and change their planned spending
• the changing mood be helped by govt. policy designed to restrain the high level of economic activity i.e. higher interest rates (tighter monetary policy) which discourages borrowing and hence consumer spending on durable goods

Question 5

What is a trough?

Answer 5

definition: period of economic malaise in which the level of aggregate expenditure is below the economy’s potential

Features

• higher levels of cyclical unemployment
• reduced company profits
• lower sales of consumer durables
• lower levels of consumer and business confidence
• reduced pressure on prices
• higher savings rates
• lower interest rates
• a lack of confidence and reluctance to spend

Question 6

What is an expansion/upswing?

Answer 6

definition: positive/faster economic growth

Causes

• productive machinery is eventually worn out and requires replacement, bringing on new investment
• businesses innovate with new products and more efficient processes as they try to attract buyers, and try to gain competitive advantage over their rivals
• the level of economic activity and confidence gradually rise as the economy resumes its long term growth path – it takes a longer period of time then the downturn

Question 7

What are indicators?

Answer 7

definition: data or information that helps describe and measure the current state of the economy

• indicators expose trends and help to forecast economic events in the future
• are an important input for business decision-making and planning
• Gross Domestic Product (GDP) is the total value of new final goods and services produced in a county during the year and is the most valuable economic indicator

Question 8

What is a leading indicator?

Answer 8

definition: predict changes in economic activity, changing before a direction becomes evident in the rest of the economy. Often reflect the expectations of households and firms

Examples

• building approvals
• share prices
• levels of inventory held by firms
• employment vacancies
• levels of business confidence
• consumer sentiment

Question 9

What is a coincident indicator?

Answer 9

definition: appear to move in line with the level of economic activity

Examples

• manufacturing output
• production of building materials
• sales of consumer durables
• retail sales
• interest rates
• growth of real GDP

Question 10

What is a lagging indicator?

Answer 10

definition: not expected to show any change until after trends in the rest of the economy has been confirmed, react to developments that occurred some time in the past

Examples

• unemployment levels
• savings bank deposit levels
• consumer debt levels

Question 11

What are other ways to categorise indicators?

Answer 11

Pro-cyclical indicator

definition: one that moves in the same direction as the level of economic activity i.e. GDP

Countercyclical indicators

definition: move in the opposite direction to the economy i.e. unemployment rate rises as economic activity slows