Trade cycle (the economic or business cycle)

Question 1

What is the trade cycle?

Answer 1

Trade cycle or economic cycle, also known as a business cycle, refers
to the fluctuation of economic activity in an economy over time.
It involves alternating periods of expansion and contraction in real
economic output, employment, and other key economic indicators.
Economic cycles are characterised by several key phases:
Rapid Expansion (Boom) - Slowdown - Peak - Recession - Trough -
Economic Recovery

Question 2

What does the trade cycle look like?

Answer 2

Question 3

What is a boom?

Answer 3

a period when the rate of growth of real GDP is fast and
higher than the long run trend

Question 4

What is a slowdown?

Answer 4

a weakening of the rate of growth; real GDP is still rising
but at a slower rate

Question 5

What is a recession?

Answer 5

a period of at least six months when an economy suffers a fall in real GDP

Question 6

What is recovery?

Answer 6

a phase after recession when real GDP starts to rise and
unemployment begins to fall

Question 7

What is depression?

Answer 7

a prolonged downturn where real GDP falls by at least
10%

Question 8

What are causes of an economic slowdown?

Answer 8

• Interest rate rise: central banks might respond to an increase in inflation by raising interest
  rates to cool down the economy, reduce AD growth and prevent excessive inflation.
• Tighter fiscal policy: government may put up taxes or cut public spending to improve public
  finances, reducing AD growth/
• A slowdown in global economic growth or the emergence of trade tensions can negatively
  impact a country’s exports and economic prospects.
• Global geopolitical events can slow growth

Question 9

What are causes of a recession?

Answer 9

• Lower consumer confidence as disposable incomes decrease
• Fall in business confidence: less investment; job loss
• Higher unemployment: as businesses lay off workers, consumer confidence falls
• Negative demand/supply-side economic shocks eg a credit crunch, a sudden rise in energy prices, a trade shock
• Poor choice of macroeconomic policy: eg too much austerity; keeping interest rates too high for too long

Question 10

What are causes of an economic recovery?

Answer 10

• Cuts in interest rates (monetary policy): to stimulate AD
• Fiscal stimulus: such as tax cuts or an increase in government spending or borrowing
• Business and consumer confidence may increase boosting AD
• Positive demand/supply-side shock eg a fall in energy prices
• More rapid global growth: boosts exports and economic prospects

Question 11

What are causes of a boom?

Answer 11

• Over confidence: ‘animal spirits’ cause a rapid increase in AD when there is
  little/no spare capacity
• Loose fiscal and/or monetary policy; allows AD to grow too rapidly