Economic Issues

Question 1

Main stages of the business cycle

Answer 1

growth, boom, recession, slump

Question 2

DEFINE the Main stages of the business cycle

Answer 2

Growth- GDP is rising, unemployment falling, businesses succeeding & higher living standards

Boom– when GDP is at its highest and there is too much spending, causing inflation to rapidly rise. Business costs will rise.

Recession– when GDP starts to fall due of high prices, as demand and spending falls. Firms will cut back production to stay profitable and unemployment may rise as a result

Slump – A long-term, serious recession: Unemployment will be very high, GDP has decreased a lot and many businesses will not survive and go bankrupt

Question 3

Main Government Objectives

Answer 3

Economic Growth
Low Inflation
Balance of Payments
Low unemployment
Income equality

Question 4

Economic Growth

Answer 4

Maintain economic growth: economic growth occurs when a country’s Gross Domestic Product (GDP) increase

A fall in GDP can lead to:

• Unemployment
• Fall in average living standards, as poverty rises
• Less investment

Question 5

Low Inflation

Answer 5

Achieve price stability: inflation is the increase in average prices of goods and services over time

Rapid inflation may lead to:
- A fall in value of money, fall in real incomes
- Wage price spiral
- Fall in international competitiveness as prices will be high
- Businesses may not want to expand and create jobs
- Living standards will fall

Question 6

Low Unemployment

Answer 6

Reduce unemployment: unemployment exists when people who are willing and able to work cannot find a job.

• the total output/GDP in the country will fall.
• inequality can rise in the economy and living standards will fall. It also means that businesses will face low demand due to low incomes.
• The government pays out unemployment benefits to the unemployed, government will not enough money left over to spend on other services.

Question 7

Balance of Payments

Answer 7

Balance of Payments
Balance of payments is a record of one country’s financial transactions internationally

Higher imports than exports lead to budget deficit
Higher exports than imports lead to budget surplus

Problems of budget deficit: -
- Government can run out of foreign currency reserves and will have to borrow
- Exchange rate depreciates – the price of our currency falls as compared to the other currency

Question 8

Government Economic Policies

Answer 8

Government expenditure
Changing tax rates
Interest Rates

Question 9

Businesses might respond to all of these policies by:

Answer 9

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Question 10

INCOME TAX

Answer 10

Income tax (direct tax)

EFFECT ON BUSINESS ACTIVITY

People have less disposable income (money after tax). They would have less money to spend on goods or services. Businesses have less revenue.

Question 11

Profits Tax

Answer 11

Profits Tax (direct tax) Tax on profits made by businesses (a set percentage)

EFFECT ON BUSINESS ACTIVITY

If tax rates increase: Harder for a business to expand (less profit) less money to reinvest back into business, Fewer people will start their own business

Question 12

Indirect Tax (VAT)

Answer 12

Indirect Tax (VAT)

EFFECT ON BUSINESS ACTIVITY

Prices of goods will increase so less people will buy them – Less demand for a business

Question 13

Import Tariffs & Quotas (indirect)

Answer 13

Import Tariffs & Quotas (indirect)

EFFECT ON BUSINESS ACTIVITY

Local businesses will have more demand because there less imported goods, Importing raw materials from abroad will be much more expensive – products will be more expensive – sell less