TOPIC 2 - Business Cycle (BHS work)

Question 1

What is a business cycle?

Answer 1

A business cycle is the recurring pattern of economic expansion and contraction in the level of economic activity in a country.

Question 2

What are the four phases of the business cycle?

tip: RBRD

Answer 2

1) Recovery: Increase in demand, production, and
employment.
2) Boom: Peak economic activity, high spending, and
inflation pressure.
3) Recession: Decline in GDP for two consecutive
quarters, job losses.
4) Depression (Trough): Lowest point, low spending
and investment.

Question 3

What are the causes of business cycles according to the Monetarist (exogenous) approach?

Answer 3

• Inappropriate government policy
• Changes in money supply
• Natural disasters
• Global shocks (e.g., oil price hikes)
• Structural changes
  ________________________________________

Question 4

What does the Keynesian (endogenous) theory say about business cycles?

Answer 4

It suggests that market economies are inherently UNSTABLE and that government intervention is necessary to smooth out fluctuations.
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Question 5

What are the tools of FISCAL POLICY?

Answer 5

• Taxation:
  Decreasing taxes to stimulate demand.
• Government Spending:
  Increasing public spending to boost economic
  activity.

Question 6

What are the tools of MONETARY policy?

Answer 6

• Interest rates
• Cash reserve requirements
• Open market operations
• Moral persuasion
• Exchange rate policy

Question 7

How can government policy smooth out the business cycle?

Answer 7

By using:

• Expansionary policies during recessions (lower taxes, increase spending)
• Contractionary policies during booms (raise taxes, cut spending)

Question 8

What is the New Economic Paradigm?

Answer 8

A pragmatic approach where governments apply balanced, transparent demand-side and supply-side policies to support long-term growth and reduce economic volatility.
________________________________________

Question 9

What are the TYPES of business cycles?

Answer 9

• Kitchin (3–5 years): Inventory adjustments
• Jugler (7–11 years): Investment changes
• Kuznets (15–20 years): Construction activity
• Kondratieff (50+ years): Technological and
  structural shifts
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Question 10

What are key features used in FORECASTING business cycles?

Answer 10

• Indicators: Leading, lagging, coincident
• Length: Duration from peak to peak or trough
  to trough
• Amplitude: Size of fluctuation
• Trend Line: Long-term economic direction
• Extrapolation and moving averages