IB Economics The Level of Overall Economic Activity 2.4: The Business Cycle Activity

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1 IB Economics: THE BUSINESS CYCLE: STUDENT LEARNING ACTIVITY Answer the questions that follow. 1. DEFINITIONS Define the following terms: Business cycle Contraction Economic growth Factors of production Inflation Long-term growth trend Negative output gap Peak/boom Positive output gap Potential GDP Potential output Real GDP Recession Recovery Trough [10 marks] 2. SHORT-ANSWER QUESTIONS 1. Use a diagram to illustrate the business cycle, label the current position of your country s economy within this cycle. [4 marks] 2. Indicate the impact on an economy s level of exports, imports, government revenue, investment, growth and employment during a peak in the business cycle. Justify your answers. [18 marks] i. Investment

2 ii. iii. iv. Exports Imports Government revenue v. Business investment vi. Growth and Employment 3. Identify the sequence of the different phases in the business cycle. [2 marks] i. iii. Peak ii.

3 Real GDP IB Economics The Level of Overall Economic Activity 4. Match the terms in A to that in B. [2 marks] A Trough Recession Peak Expansion B Recovery or upswing Boom Depression Downswing or contraction 5. Explain the link between the business cycle and inflation rates. [4 marks] 6. Which phase of the business cycle is the economy at in June of Year 3? Justify your answer. [2 marks] 7. June Year 1 June Year 2 June Year 3 June Year 4 Unemployment rate 3.4% 4.1% 5.7% 6.3% Economic growth 1.6% 2.5% -1.2% 0.7% 8. Identify the points on the business cycle diagram below. [3 marks] vi. vii. ii. i. iii. iv. v. Time

4 9. On the diagram above, identify a period where there is a positive economic output gap and a period where the economic output gap is negative. [2 marks] 10. Distinguish between short-term fluctuations in the business cycle and the long-term, growth trend of an economy. [2 marks] 11. Explain why an economy cannot maintain a rate of economic growth above its potential output for an indefinite amount of time. [4 marks] 12. Distinguish between a decrease in real GDP and a decrease in GDP growth. [2 marks] 13. Explain why real GDP and not nominal GDP is the preferred indicator of economic growth. [2 marks] 3. MULTICHOICE QUESTIONS Choose the best answer to each question. [40 marks] 1. The trough of a business cycle occurs when hits its lowest point. a. Inflation b. The money supply c. Aggregate economic activity d. The unemployment rate 2. When actual GDP is greater than potential GDP there is: a. A positive output gap b. A negative output gap c. Lower inflation d. Unemployment of the factors of production 3. The low point in the business cycle is referred to as the a. Expansion b. Boom c. Recession d. Trough 4. When overall economic activity is increasing, the economy is said to be in: a. An expansion b. A recession c. A peak d. A turning point

5 5. When aggregate economic activity is declining, the economy is said to be in: a. An expansion b. A recession c. A trough d. A turning point 6. Which of the following is not the correct order of the business cycle? a. Trough Expansion Peak Recession b. Recession Trough Expansion Peak c. Recession Expansion Trough Peak d. Expansion Peak Recession Trough 7. How is potential growth of an economy measured? a. Projected rates if all resources are efficiently employed b. Extrapolation of past growth rates c. Historical growth rates d. Present growth rates 8. Peaks and troughs of the business cycle are known collectively as: a. Volatility b. Turning points c. Equilibrium points d. Real business cycle events 9. An economic variable that doesn t move in a consistent pattern with aggregate economic activity is called: a. Procyclical b. Countercyclical c. Acyclical d. A leading variable 10. When an economy experiences the first decline in economic activity during the recurring cycle: a. Unemployment increases b. GDP increases c. Investment increases d. Inflation increases 11. Which stage of the business cycle is missing?, Peak, Recession and Trough. a. Depression b. Boom c. Expansion d. Contraction

6 12. A variable that tends to move in advance of aggregate economic activity is called: a. A leading variable b. A coincident variable c. A lagging variable d. An acyclical variable 13. A variable that tends to move at the same time as aggregate economic activity is called: a. A leading variable b. A coincident variable c. A lagging variable d. An acyclical variable 14. A variable that tends to move later than aggregate economic activity is called: a. A leading variable b. A coincident variable c. A lagging variable d. An acyclical variable 15. A decrease in real GDP is not the same as: a. Negative growth b. A decrease in aggregate economic activity c. A recession in the business cycle d. A decrease in the growth of GDP 16. A negative output gap is where: a. Potential GDP is greater than the long-term trend b. Actual GDP is greater than potential GDP c. Potential GDP is greater than actual GDP d. Potential GDP is less than actual GDP 17. Which economic variable is not associated with an economic recovery? a. Business confidence b. Consumer confidence c. Potential growth d. Aggregate demand 18. Which phase of a business cycle occurs after a trough and before a peak? b. Expansion. c. Contraction. d. Lag e. Consolidation.

7 19. Which of the following is not the correct order of the business cycle? a. Trough Expansion Peak Recession b. Recession Trough Expansion Peak c. Expansion Peak Recession Trough d. Recession Expansion Trough Peak 20. During an economic boom, which is least likely to occur? a. Decreased spending on imports b. Decreased export receipts c. Decreased unemployment rate d. Decreased aggregate demand 21. Which stage of the business cycle is missing? Expansion, Peak, Recession and. a. Depression b. Trough c. Boom d. Contraction 22. When potential GDP is greater than actual GDP there is: a. Increased inflation in an economy b. Decreased unemployment c. A positive output gap d. A negative output gap 23. Which of the following marks the beginning of a contraction in the business cycle? a. Recession b. Trough c. Expansion d. Peak 24. Business cycles are measured from: a. Peak to peak b. Recession to recession c. Peak, depression, trough and boom d. Peak, depression, bust and boom 25. Which of these is not an exogenous shock affecting the potential growth of an economy? a. A massive increase in the price of oil b. A massive decrease in economies of scale c. A global banking crisis d. A sovereign debt crisis 26. Which stage of the business cycle is missing? Expansion, Peak, and Trough.

8 a. Recession b. Depression c. Boom d. Contraction 27. A technical recession is when an economy experiences or more consecutive quarter(s) of negative growth: a. 1 b. 2 c. 3 d Which would most likely occur during a period of recession? a. Cost-push inflation occurs b. Unemployment rate falls c. Production increase d. Real gross domestic output falls. 29. An expansion in the business cycle is measured from: a. Peak to peak b. Expansion to peak c. Trough to peak d. Trough to trough 30. The level of employment and output is immediately determined by: a. The level of aggregate demand b. The price level c. The unemployment rate d. Productive capacity 31. A contraction in the business cycle is measured from: a. Peak to peak b. Expansion to peak c. Trough to peak d. Trough to trough 32. The period of the business cycle in which real GDP is increasing is called the a. Expansion b. Peak c. Recession d. Trough 33. A positive output gap is where:

9 a. Actual GDP is greater than potential GDP b. Potential GDP is greater than actual GDP c. Actual GDP is less than potential GDP d. Potential GDP is greater than the long-term trend 34. If growth in real GDP was 2.2% in 2016 and 1.9% in 2017, then: a. Real GDP has decreased b. The growth rate of GDP has decreased c. Economic activity has fallen d. The economy is in a recession 35. What term describes GDP data that have been adjusted for changes in the price level? a. Real GDP b. Current GDP c. Actual GDP d. Nominal GDP 36. A recession is said to occur, when over a period of six months, there is a: a. Decrease in real GDP per capita b. An increase in nominal GDP per capita c. Decrease in the level of economic activity d. Negative change in the economic rate of activity 37. Which stage of the business cycle is missing? Expansion,, Recession and Trough. a. Depression b. Boom c. Contraction d. Peak 38. Which of the following is not the correct order of the business cycle? a. Trough Expansion Peak Recession b. Recession Expansion Trough Peak c. Recession Trough Expansion d. Expansion Peak Recession Trough 39. Which term is used to describe recurring upswings and downswings in an economy's real GDP over time? a. Recessions b. Business cycles c. Output gaps d. Total product oscillations 40. A decline in the rate of real GDP growth is not the same as:

10 a. Slowing growth b. A decrease in real GDP c. An increase in real GDP d. Positive economic growth 4. TRUE OR FALSE QUESTIONS Indicate whether the following statements are true or false. 1. The intensity of troughs in a business cycle can vary. True False 2. The business cycle follows such a stable pattern that it makes the task of predicting the next phase simple. True False 3. It is possible that a peak in the business cycle could be accompanied by significant unemployment. True False 4. It is likely that economic conditions of business confidence, interest rates, levels of inflation, unemployment and consequently economic activity change continuously. True False 5. A recovery in an economy may be only partial (i.e. without attaining a peak) with another slump following closely on a past trough. True False 6. A recession is said to occur if two or more consecutive quarters of negative growth are experienced. True False 7. In a boom time there are inflationary pressures as firms compete for scarce resources. True False 8. A key determinant of investment expenditure is business confidence. True False 9. Not all economies are subject to the business cycle in the long-term. True False 10. A contraction is the same as a technical recession. True False Source: