The Economic Cycle (Business cycle) - Stages, characteristics and causes

Question 1

What is the economic cycle also known as?

Answer 1

Business Cycle

The economic cycle refers to the fluctuations in economic activity over time, typically characterized by periods of expansion and contraction.

Question 2

What are the four different stages of the economic cycle?

Answer 2

• Recovery
• Peak
• Recession
• Trough

These stages represent the various phases an economy experiences during its cycle.

Question 3

What characterizes a boom in the economic cycle?

Answer 3

Actual growth is at its peak

A boom indicates strong economic performance, where growth rates are significantly high.

Question 4

What defines a recession in economic terms?

Answer 4

Two successive quarters of negative growth

A recession indicates a decline in economic activity and is a critical phase in the economic cycle.

Question 5

What does the upward sloping line in the economic cycle diagram represent?

Answer 5

Strong, sustained economic growth

This line illustrates the general upward trend of the economy despite fluctuations.

Question 6

True or False: The economic cycle is completely smooth and consistent.

Answer 6

False

The economic cycle consists of fluctuations, indicating periods of both growth and decline.

Question 7

Fill in the blank: When growth starts to fall from a boom, we can call that a _______.

Answer 7

Recession

This transition marks the beginning of a downturn in economic activity.

Question 8

What happens during the recovery stage of the economic cycle?

Answer 8

Economic activity begins to increase

Recovery is characterized by a gradual improvement in economic conditions.

Question 9

What does the term ‘Trough’ refer to in the economic cycle?

Answer 9

The lowest point of economic activity

This stage indicates a significant downturn before recovery begins.

Question 10

What is the overall goal of the economic cycle?

Answer 10

To achieve strong, sustained, and sustainable growth

Sustainable growth is essential for long-term economic stability.

Question 11

What does a negative gap in the economic cycle indicate?

Answer 11

Actual growth losses

A negative gap shows that the economy is underperforming relative to its potential.

Question 12

What is known as the trough?

Answer 12

The worst position from a recession

This marks the lowest point in the economic cycle before recovery begins.

Question 13

What characterizes a recovery in the economy?

Answer 13

When things start to get better

Recovery follows the trough and indicates positive economic growth.

Question 14

What is a positive output gap?

Answer 14

When actual growth is greater than potential growth

Indicates that the economy is performing above its potential capacity.

Question 15

What is a negative output gap?

Answer 15

When actual growth is less than potential growth

Indicates underperformance in the economy compared to its potential.

Question 16

List the characteristics of the economic cycle during a boom.

Answer 16

• Growth will be rampant
• Actual growth likely to exceed potential growth
• Positive output gap in the economy
• Firms experiencing high profits
• Unemployment likely to be very low
• High consumer and business confidence
• Increased consumer spending
• High imports due to increased earnings
• Government benefits from high tax revenues

These factors indicate a thriving economy, but can also lead to inflationary pressures.

Question 17

True or False: During a boom, firms will likely face high unemployment.

Answer 17

False

Unemployment is expected to be very low during a boom due to high demand for labor.

Question 18

Fill in the blank: When firms are profitable, they need to ______ workers.

Answer 18

[employ]

This is to meet the increased production demands during a boom.

Question 19

What happens to consumer confidence during a boom?

Answer 19

It is high

This often drives increased consumer spending in the economy.

Question 20

What type of gap exists when actual growth exceeds potential growth?

Answer 20

Positive output gap

This indicates that the economy is outperforming its potential capacity.

Question 21

What defines a recession in economic terms?

Answer 21

Two successive quarters of negative GDP growth.

Question 22

What happens to aggregate demand (AD) during a recession?

Answer 22

AD declines, leading to a negative output gap.

Question 23

How does a recession affect unemployment?

Answer 23

Unemployment rises as firms cut costs and reduce labor demand.

Question 24

What are signs of falling consumer and business confidence during a recession?

Answer 24

Less consumer spending, less investment, and lower production.

Question 25

How do house prices and construction behave in a recession?

Answer 25

Both house prices and construction activity tend to fall.

Question 27

What is de-stocking and why do firms do it during a recession?

Answer 27

Selling off existing inventory without producing more, to cut costs and clear stock.

Question 28

What happens to inflation during a recession?

Answer 28

Demand-pull inflation decreases due to falling demand.

Question 29

What macroeconomic policies are used to combat a recession?

Answer 29

Lower interest rates, increased government spending, and reduced taxation.

Question 30

Why do imports decrease during a recession?

Answer 30

Lower incomes reduce consumer demand for imported goods.

Question 31

What indicates the start of economic recovery?

Answer 31

Rising consumer and business confidence, and increased spending.

Question 32

How do house prices react in a recovery phase?

Answer 32

House prices typically rise due to increased demand.

Question 33

What happens to investment during recovery?

Answer 33

Businesses invest more in expansion and capital equipment.

Question 34

What role does construction play during recovery?

Answer 34

Construction rises from both business investment and consumer home renovation.

Question 35

Why might loose macroeconomic policies continue during early recovery?

Answer 35

To ensure the economy doesn't slip back into recession.

Question 36

Why does actual economic growth fluctuate instead of rising steadily?

Answer 36

Because of unpredictable economic shocks that disrupt growth, causing recessions and booms.

Question 37

What are economic shocks?

Answer 37

Unexpected events that affect aggregate demand or supply, causing fluctuations in GDP.

Question 38

What are demand-side shocks?

Answer 38

Shocks that affect aggregate demand (AD), such as interest rate hikes or crashes in consumer confidence.

Question 39

Give three examples of demand-side shocks.

Answer 39

Sudden increase in interest rates Cut in government spending Housing market crash

Question 40

What was a major example of a financial demand-side shock?

Answer 40

The 2008–2009 financial market crash, which led to a global recession.

Question 41

How can tax changes cause demand-side shocks?

Answer 41

A sudden rise in income or corporate tax reduces spending and investment, potentially triggering recession.

Question 42

What are supply-side shocks?

Answer 42

Unexpected changes that affect production costs and supply, such as natural disasters or rising raw material costs.

Question 43

Give three examples of supply-side shocks.

Answer 43

Natural disasters or wars Sustained increase in raw material prices Sharp rise in business taxes (e.g. VAT)

Question 44

How can a weaker exchange rate cause a supply-side shock?

Answer 44

It makes imported raw materials more expensive, increasing production costs.

Question 45

Can economic shocks be predicted?

Answer 45

No — they are unexpected, which is why the economy doesn’t grow in a smooth upward line.