Economics Business Cycle

Year 11 ATAR Task 6

What is the business cycle?

The business cycle is the pattern of fluctuations in economic activity around an economy's long-term growth trend.

What economic measure is commonly used to track the business cycle?

Real GDP is commonly used to track the business cycle because it measures changes in economic output after removing the effect of price changes.

What does the long-term growth trend represent on a business cycle diagram?

It represents the economy's increasing potential level of output over time.

What is meant by an economy's potential level of output?

The level of output an economy can sustainably produce when its resources are being used at normal or sustainable levels.

Why does economic activity fluctuate over time?

Economic activity changes because of changes in consumption, investment, government spending, exports, confidence, interest rates and supply conditions.

What are the four main phases of the business cycle?

Expansion, peak, contraction and trough.

What are two characteristics of an economic expansion?

Real GDP and employment generally increase, while consumer and business confidence, spending and investment tend to increase.

What usually happens to real GDP during a contraction?

Real GDP generally falls or grows very slowly as economic activity weakens.

Why does unemployment generally fall during an expansion?

Higher demand and production encourage businesses to employ more workers.

Why might inflationary pressure increase as the economy approaches a peak?

High demand can push the economy close to or above sustainable productive capacity, increasing pressure on prices and wages.

What generally happens to consumer confidence during a downturn?

Consumer confidence generally falls because households become more uncertain about employment, income and future economic conditions.

Why are businesses less likely to invest during a contraction?

Lower sales, profits and business confidence reduce expected returns from investment, making firms less willing to invest.

What economic conditions may indicate that the economy is close to a trough?

Output and employment are weak, cyclical unemployment is high and leading indicators may begin to improve.

What could help an economy begin recovering from a trough?

Stronger consumer or business confidence can increase consumption and investment, increasing aggregate demand and economic activity.

What is an output gap?

The output gap is the difference between an economy's actual real GDP and its potential GDP.

What is a positive output gap?

A positive output gap occurs when actual real GDP is above potential GDP.

What is a negative output gap?

A negative output gap occurs when actual real GDP is below potential GDP.

What is the difference between a positive and negative output gap?

A positive gap means actual output is above potential output, while a negative gap means actual output is below potential output.

What is a recession?

A recession is a significant decline in economic activity. A technical recession is commonly defined as two consecutive quarters of negative real GDP growth.

Why does one weak quarter of economic growth not necessarily mean the economy is in a recession?

One weak quarter does not necessarily show a sustained or broad decline in economic activity. Other indicators such as employment, income and production should also be considered.

Where is unemployment likely to be highest in the business cycle?

Unemployment is generally highest around the trough.

Where is inflationary pressure likely to be strongest in the business cycle?

Inflationary pressure is generally strongest near the peak when the economy is operating close to or above sustainable capacity.

What is an economic indicator?

An economic indicator is a statistic or measure that provides information about current or future economic activity.

What is a leading indicator?

A leading indicator changes before overall economic activity changes and can provide information about the future direction of the economy.

What is a coincident indicator?

A coincident indicator changes at approximately the same time as overall economic activity.

What is a lagging indicator?

A lagging indicator changes after overall economic activity has already changed.

Why might building approvals be considered a leading indicator?

Building approvals often change before construction, employment and spending occur, so they can provide information about future economic activity.

Why is the unemployment rate generally considered a lagging indicator?

Businesses may take time to change employment after economic conditions change, so unemployment can respond after a recovery or downturn has already begun.

Give one example of a coincident economic indicator.

Real GDP or industrial production can be examples of coincident indicators.

How could rising consumer confidence affect future economic growth?

Higher confidence may encourage households to increase consumption, increasing aggregate demand and supporting future economic growth.

What might falling business investment suggest about the future direction of the economy?

It may suggest weaker business confidence and lower expected demand, which could signal slower future economic growth.

Why might retail sales rise during an economic recovery?

Increasing employment, household income and confidence can encourage households to spend more.

How are employment levels likely to respond after economic growth begins to slow?

Employment may continue increasing for a time because businesses often adjust employment with a delay. If the slowdown continues, employment may eventually weaken.

Consumer confidence is rising, building approvals are increasing and businesses are ordering more equipment. What may happen to economic activity next?

Economic activity may strengthen because these leading indicators suggest increasing consumption, construction and investment.

Real GDP is falling, unemployment is rising and retail spending is weakening. Which phase is the economy most likely experiencing?

A contraction or downturn.

Household incomes and employment are increasing. How could this affect household borrowing?

Higher incomes and employment can increase household confidence and ability to repay loans, which may encourage borrowing and spending.

Businesses report falling sales and begin reducing production. How may this eventually affect employment?

Lower production reduces the need for workers, so businesses may reduce hiring or employment if weak sales continue.

An economy is operating above its productive capacity. What two economic problems could develop?

Inflationary pressure and shortages of labour or other resources could develop.

How can changes in interest rates influence the business cycle?

Lower interest rates can encourage borrowing, consumption and investment, increasing aggregate demand. Higher interest rates can reduce borrowing and spending, weakening aggregate demand.

How can increased government spending support an economy during a downturn?

Higher government spending directly increases aggregate demand and can support incomes, employment and output through the multiplier process.

What types of recent events can affect the Australian business cycle?

Events such as the COVID-19 pandemic and global supply or energy shocks can affect Australian economic activity through changes in demand, production, trade, prices and confidence.

Why might different economic indicators provide conflicting information about the current phase of the cycle?

Indicators respond at different times and measure different parts of the economy, so leading, coincident and lagging indicators can give different signals.

Why do economists examine several indicators rather than relying only on real GDP?

Real GDP does not capture every part of economic activity. Employment, income, spending, investment, confidence and other indicators provide additional information.

What is an expansion?

An expansion is a phase of the business cycle where economic activity generally increases, with rising real GDP, employment, spending and confidence.

What is a peak?

A peak is the highest point of economic activity before the economy begins to contract.

What is a contraction?

A contraction is a phase where economic activity decreases or weakens, with falling or weak real GDP growth and generally rising unemployment.

What is a trough?

A trough is the lowest point of economic activity before the economy begins to recover and expand.

How can a business cycle diagram be labelled?

A typical diagram shows a long-term growth trend with the actual level of economic activity fluctuating around it through expansion, peak, contraction and trough.

Where would unemployment be highest on a typical business cycle diagram?

Around the trough, because economic activity and demand for labour are weakest.

Where would inflationary pressure be strongest on a typical business cycle diagram?

Around the peak, when demand is strong and the economy may be close to or above productive capacity.

What is a technical recession?

A technical recession is commonly defined as two consecutive quarters of negative real GDP growth.

What is the difference between the level of real GDP and the growth rate of real GDP?

The level of real GDP measures the amount of real output, while the growth rate measures the percentage change in real GDP.

Can an economy still be expanding if its GDP growth rate falls?

Yes. If real GDP is still increasing but at a slower rate, economic activity is still expanding.

What is the multiplier process?

The multiplier process occurs when an initial change in spending causes further changes in income and spending throughout the economy.

How can saving deepen a downturn?

If households become worried and save more instead of spending, consumption and aggregate demand may fall further.

Why can a fall in investment cause a larger final fall in national income?

Lower investment reduces incomes for businesses and workers, which can cause further reductions in household consumption.

What is an automatic stabiliser?

An automatic stabiliser is a government mechanism that automatically reduces fluctuations in economic activity without requiring a new policy decision.

Give an example of an automatic stabiliser during a contraction.

Tax receipts may fall while welfare payments rise automatically as incomes and employment decrease.

Why can monetary policy have a weak effect during a severe downturn?

Households and businesses may remain unwilling to borrow or spend when confidence is very low, even when interest rates fall.

What is cyclical unemployment?

Cyclical unemployment occurs because of weak aggregate demand during downturns in the business cycle.

What is structural unemployment?

Structural unemployment occurs when there is a mismatch between workers' skills or locations and the jobs available.

What is stagflation?

Stagflation is a combination of weak or falling economic growth, rising unemployment and high inflation.

What is an adverse supply shock?

An adverse supply shock is an unexpected event that raises production costs or reduces productive capacity.

How can an oil-price shock affect the economy?

Higher oil prices can increase firms' production costs, causing higher inflation and lower output.

Why can inflation continue rising after GDP growth slows?

Wages and prices can adjust with a delay, meaning inflation may continue rising after economic growth has started to slow.

What is a self-sustaining recovery?

A recovery is self-sustaining when consumption, investment and employment reinforce one another instead of relying entirely on temporary government support.

How can recessions in Australia's trading partners affect Australia?

Lower foreign demand can reduce Australian exports, reducing aggregate demand and economic activity in Australia.

How can business confidence amplify business-cycle fluctuations?

Business confidence affects decisions about investment, hiring and inventories, so changes in expectations can increase changes in economic activity.

What is a depression?

A depression is a particularly severe and prolonged contraction involving major falls in output and employment.

How can leading indicators signal recovery before unemployment improves?

Leading indicators change earlier, while unemployment is a lagging indicator and can take longer to respond.

What is income?

Income is the flow of money received by individuals or households over a period of time, such as wages, salaries, rent, interest and profits.

What is wealth?

Wealth is the value of assets owned by an individual or household minus their liabilities.

What is the difference between income and wealth?

Income is a flow received over a period of time, while wealth is a stock measured at a particular point in time.

What is income distribution?

Income distribution refers to how total income is divided among individuals or households in an economy.

What is wealth distribution?

Wealth distribution refers to how total wealth or assets are distributed among individuals or households.

What is the Lorenz Curve?

The Lorenz Curve is a graphical measure of inequality that compares the cumulative percentage of income or wealth received with the cumulative percentage of the population.

What does the line of equality on a Lorenz Curve represent?

It represents perfectly equal distribution, where each percentage of the population receives the same percentage of income or wealth.

What does a Lorenz Curve further from the line of equality indicate?

It indicates greater inequality in the distribution of income or wealth.

What is the Gini coefficient?

The Gini coefficient is a numerical measure of inequality based on the Lorenz Curve.

What does a Gini coefficient closer to zero indicate?

It indicates a more equal distribution of income or wealth.

What does a Gini coefficient closer to one indicate?

It indicates a more unequal distribution of income or wealth.

What is the purpose of measuring income and wealth distribution?

It helps show how evenly or unevenly income and wealth are distributed across the population.

What is Commonwealth government revenue?

Commonwealth government revenue is the money received by the Australian Government, mainly through taxation and other receipts.

What is Commonwealth government spending?

Commonwealth government spending is government expenditure on areas such as social security, health, education, defence, infrastructure and other public services.

What is the main source of Commonwealth government revenue?

Taxation is the major source of Commonwealth government revenue.

What is direct taxation?

Direct taxation is a tax imposed directly on the income or wealth of individuals or organisations.

What is indirect taxation?

Indirect taxation is a tax on spending or transactions, usually collected by businesses and passed on to the government.

What is progressive taxation?

A progressive tax takes a higher percentage of income as income increases.

What is regressive taxation?

A regressive tax takes a higher percentage of income from lower-income people than from higher-income people.

What is proportional taxation?

A proportional tax takes the same percentage of income regardless of income level.

What are taxes on income?

Taxes on income are taxes imposed on income earned by individuals or businesses, such as personal income tax and company tax.

What are taxes on expenditure?

Taxes on expenditure are taxes applied to spending on goods and services, such as GST and excise duty.

What is personal income tax?

Personal income tax is a direct tax on the income earned by individuals.

What is the GST?

The goods and services tax is an indirect tax on most goods and services purchased in Australia.

What is company tax?

Company tax is a direct tax imposed on the taxable income of companies.

What is excise duty?

Excise duty is an indirect tax imposed on particular goods, such as fuel, alcohol and tobacco.

What are the main macroeconomic objectives of the Australian Government?

Sustainable economic growth, price stability, full employment and a more equitable distribution of income.

What is sustainable economic growth?

Sustainable economic growth is an increase in economic output over time that can continue without creating unacceptable economic or environmental problems.

What is price stability?

Price stability means keeping inflation low and reasonably stable so the purchasing power of money is maintained.

What is full employment?

Full employment means that people who are willing and able to work can generally find employment, allowing for some normal frictional and structural unemployment.