2.5 The economic cycle

• what is the economic cycle

  refers to stages of economic prosperity and decline
• what stages of the economic cycle are inflationary

  booms and recoveries
• what stages of the economic cycle are accompanied by govt. spending

  recessions
• what stage of the economic cycle would tax revenue be the highest, and why

  Booms

  Aggregate demand is high, firms produce more units of output so pay more corporation tax, and consumers earn higher wages so pay more income tax
• when do consumers and firms have the lowest levels of confidence

  during economic slumps
• name 3 injections and withdrawals to the circular flow of income

  INJECTIONS : exports, investment , government spending

  WITHDRAWALS: imports , savings, taxes
• when does the economy reach equilibrium

  when the rate of withdrawals = the rate of injections
• income =

  output - expenditure
• components of AD

  • Consumption
  • Investment
  • Government spending
  • Net trade
• largest component of AD

  Consumption
• disposable income

  income left over for consumers to spend once taxes have been deducted
• how do low interest rates encourage consumer spending

  low interest rates make it cheaper to borrow money and discourages saving. They also lower the cost of variable rate mortgages, increasing disposable income
• how do business confidence and capital investment correlate

  as confidence increases, so does capital investment
• is fiscal policy demand-side or supply-side

  demand side
• when would the govt/ initiate contractionary fiscal policy

  during economic booms, in order to ease inflationary pressures and prevent any periods of economic instability
• how would the exchange rate affect the current account deficit

  a depreciation of the pound (£) makes imports expensive and exports cheap , thus lowering the deficit and boosting economic growth
• how would the govt intervene to reduce the current account deficit

  by adopting protectionist measures, whereby tariffs against imports increase and British firms are subsidised to improve their competitiveness
• 4 factors affecting AS

  • cost of employment
  • cost of raw materials
  • government regulation
  • migration
• which way would the SRAS curve shift given an inc. in taxes

  shift to the left
• which way would the SRAS curve shift given a decrease in the cost of raw materials

  shift to the right
• define inflation

  persistent increase in the general price level of goods/services over a period of time
• how does deflation differ from disinflation

  • deflation = fall in the general price level
  • disinflation = fall in the rate of inflation
• what is the target inflation rate in the UK

  2%
• consumer price index

  a survey used to find a weighted basket of goods. The prices of these goods are measured and updated annually.
• how does the Retail Price Index differ from the CPI

  the RPI includes housing costs, and therefore generally has a higher value than CPI
• difference between nominal values and real values

  real values take into account the rate of inflation
• type of inflation caused by exchange rate depreciation

  demand-pull inflation
• when does cost push inflation occur

  during a inward shift of aggregate supply, whereby firms face higher costs
• type of inflation when workers demand higher wages

  cost-push inflation
• how does inflation benefit those in debt

  value of debt erodes over time with inflation, so consumers don't have to pay back as much
• how would inflation be a burden on firms

  workers would see their real income erode when accounting for inflation, therefore they would demand higher wages which increases costs for firms
• how does someone unemployed differ from someone economically inactive

  unemployed are those who are able to work and actively seeking a job, whereas those economically inactive choose to remain out of a job
• how does the claimant count work

  counts the number of people claiming unemployment related benefits
• main disadvantage of using the claimant count

  many of those unemployed don't claim benefits
• 2 things that the Labour Force Survey asks

  • if the subject has been out of work for 4 weeks
  • whether or not the subject can start work within 2 weeks
• structural unemployment

  occurs when there is a mismatch between skills provided and skills required
• when does cyclical unemployment occur

  when there is a lack of demand in a industry or economy