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Boom
Downturn or recession
Slump or trough
Recovery

","mcqOptions":[{"text":"

Boom
Downturn or recession
Slump or trough
Recovery

","correct":true,"explanation":"These are the four standard phases of the trade cycle: rapid expansion, weakening activity, the lowest point of output, and the subsequent improvement in economic activity."},{"text":"

Recovery
Boom
Downturn or recession
Slump or trough

","correct":false,"explanation":"This sequence starts with improvement and places the low point last, reversing the usual cycle. The correct phases are boom, downturn or recession, slump or trough, and recovery."},{"text":"

Inflation
Deflation
Stagflation
Price stability

","correct":false,"explanation":"These are descriptions of changing price conditions, not phases of fluctuations in economic activity. The trade cycle consists of boom, downturn or recession, slump or trough, and recovery."},{"text":"

Expansion
Peak
Contraction
Depression

","correct":false,"explanation":"These terms describe related stages but do not give the required phase labels, especially the distinct recovery stage. The recognised answer is boom, downturn or recession, slump or trough, and recovery."}]},{"id":"93b5b4b3-dd24-4219-8a75-f7cfe25f650b","cardType":"basic","points":2,"front":"How can the trade cycle repeat while the economy's long-run output still rises?","back":"Trend output continues to rise over the long run, although actual output fluctuates around it.","mcqOptions":[{"text":"Trend output continues to rise over the long run, although actual output fluctuates around it.","correct":true,"explanation":"Long-run growth raises the economy's productive potential, represented by trend output, while short-run booms and recessions cause actual output to move above and below that trend."},{"text":"Actual output continues to rise over the long run, although trend output fluctuates around it.","correct":false,"explanation":"The long-run path is represented by trend output, while actual output fluctuates around it during the trade cycle. Confusing these measures reverses their roles in explaining economic growth."},{"text":"Price levels continue to rise over the long run, although actual output fluctuates around them.","correct":false,"explanation":"Inflation concerns the general price level and cannot explain why output fluctuates around a rising long-run path. Trend output is the measure that continues to rise over time."},{"text":"Unemployment continues to rise over the long run, although actual output fluctuates around it.","correct":false,"explanation":"Unemployment generally varies cyclically and does not provide the economy's rising long-run output path. Trend output rises over time, with actual output moving around it during expansions and recessions."}]},{"id":"8c06e0c9-5011-4e72-a608-b5f2bcf43cca","cardType":"basic","points":2,"front":"What are the main signals of a boom?","back":"A boom has above-trend real GDP growth, low unemployment and building demand-pull inflation.","mcqOptions":[{"text":"A boom has above-trend real GDP growth, low unemployment and building demand-pull inflation.","correct":true,"explanation":"A boom is a period of exceptionally strong activity: real GDP grows faster than its trend, labour demand reduces unemployment, and rising demand creates inflationary pressure."},{"text":"A boom has below-trend real GDP growth, low unemployment and building demand-pull inflation.","correct":false,"explanation":"Low unemployment and demand-pull inflation can accompany strong activity, but growth below trend indicates weakness rather than a boom. Boom conditions require growth above the economy's trend rate."},{"text":"A boom has above-trend real GDP growth, high unemployment and falling demand-pull inflation.","correct":false,"explanation":"Strong output growth normally increases labour demand and inflationary pressure, so high unemployment and falling demand-pull inflation indicate contraction. The boom signal combines above-trend growth with low unemployment."},{"text":"A boom has below-trend real GDP growth, high unemployment and falling demand-pull inflation.","correct":false,"explanation":"This combination describes a weak economy moving towards recession or a trough, not a boom. A boom involves above-trend growth, low unemployment and increasing demand-pull inflation."}]},{"id":"8c880ff4-8431-4739-8ad7-29a2347517cc","cardType":"basic","points":1,"front":"What typically happens to unemployment during a downturn?","back":"Growth slows and firms cut hiring, so unemployment begins to rise.","mcqOptions":[{"text":"Growth slows and firms cut hiring, so unemployment begins to rise.","correct":true,"explanation":"Slower demand reduces firms' need to recruit and may lead to redundancies, so the number of people without work begins to increase during a downturn."},{"text":"Growth slows and firms cut hiring, so unemployment begins to fall.","correct":false,"explanation":"Reduced hiring limits the creation of jobs and can lead to redundancies, so unemployment tends to increase rather than decrease. Falling unemployment is more consistent with recovery."},{"text":"Growth accelerates and firms cut hiring, so unemployment remains unchanged.","correct":false,"explanation":"A downturn is associated with slowing growth, and weaker labour demand usually affects employment. Assuming unemployment stays unchanged overlooks the typical cyclical rise caused by reduced hiring."},{"text":"Growth slows and firms increase hiring, so unemployment begins to fall.","correct":false,"explanation":"Increasing recruitment would normally reduce unemployment, but firms typically respond to weaker growth by limiting hiring. During a downturn, unemployment generally begins to rise."}]},{"id":"b385dbea-1426-461c-8b47-404c03a4e698","cardType":"basic","points":2,"front":"Why do government tax receipts usually fall during a recession?","back":"In a recession, falling real GDP causes incomes and tax receipts to drop.","mcqOptions":[{"text":"In a recession, falling real GDP causes incomes and tax receipts to drop.","correct":true,"explanation":"Recession reduces production and employment, lowering household and business incomes. Because many taxes are linked to income, profits and spending, government receipts usually decline."},{"text":"In a recession, falling real GDP causes incomes and tax rates to drop.","correct":false,"explanation":"Government may change tax rates, but the automatic effect of weaker activity is lower tax receipts. Falling incomes and spending reduce the amount collected at existing rates."},{"text":"In a recession, rising real GDP causes incomes and tax receipts to increase.","correct":false,"explanation":"Rising real GDP describes expansion rather than recession and would generally increase incomes and tax receipts. A recession involves falling output and weaker taxable activity."},{"text":"In a recession, falling real GDP causes prices and tax receipts to increase.","correct":false,"explanation":"Lower output does not automatically raise tax receipts, and recession commonly weakens taxable incomes and spending. The usual consequence is falling incomes and lower government revenue."}]},{"id":"32bf4b75-6593-4db6-8be8-b13571eeb188","cardType":"basic","points":2,"front":"What characterises a slump or trough?","back":"At a trough, output is at its lowest point, spare capacity is widest and confidence is lowest.","mcqOptions":[{"text":"At a trough, output is at its lowest point, spare capacity is widest and confidence is lowest.","correct":true,"explanation":"A trough marks the bottom of the trade cycle. Weak demand leaves firms with substantial unused resources, while households and businesses have particularly low confidence."},{"text":"At a trough, output is at its highest point, spare capacity is narrowest and confidence is highest.","correct":false,"explanation":"These conditions describe the peak of a boom, when resources are heavily used and confidence is strong. A trough is characterised by minimum output, maximum spare capacity and weak confidence."},{"text":"At a trough, output is at its lowest point, spare capacity is narrowest and confidence is highest.","correct":false,"explanation":"Minimum output is consistent with a trough, but weak demand leaves more resources unused and confidence tends to be low. Narrow spare capacity and high confidence indicate a boom."},{"text":"At a trough, output is at its highest point, spare capacity is widest and confidence is lowest.","correct":false,"explanation":"A trough is the cycle's low point, so output cannot be at its maximum. Wide spare capacity and low confidence are correctly associated with the trough, but the output description is reversed."}]},{"id":"e0eef72f-ca4a-4fae-83e2-a4a5a1868c9b","cardType":"basic","points":2,"front":"How does a recovery affect real GDP and unemployment?","back":"Reviving confidence and spending raise real GDP towards trend output and reduce unemployment.","mcqOptions":[{"text":"Reviving confidence and spending raise real GDP towards trend output and reduce unemployment.","correct":true,"explanation":"Recovery strengthens demand, encouraging firms to increase production and recruitment. Consequently, real GDP moves back towards its long-run trend and cyclical unemployment falls."},{"text":"Reviving confidence and spending raise real GDP towards potential output and increase unemployment.","correct":false,"explanation":"Recovery usually improves labour demand, so unemployment falls rather than rises. Although potential output is related to productive capacity, the specified destination in this trade-cycle description is trend output."},{"text":"Falling confidence and spending reduce real GDP towards trend output and reduce unemployment.","correct":false,"explanation":"Falling confidence and spending describe weakening activity, while reduced output normally lowers labour demand and raises unemployment. Recovery instead involves revived demand, rising GDP and falling unemployment."},{"text":"Reviving confidence and spending lower real GDP towards actual output and reduce unemployment.","correct":false,"explanation":"Stronger confidence and spending increase, rather than lower, real GDP. Actual output is the measure being moved, so it cannot be its own destination; recovery moves GDP towards trend output."}]},{"id":"028fe6e9-361a-436d-b1ba-038bd42f7184","cardType":"basic","points":1,"front":"When is the output gap positive?","back":"A positive output gap occurs when actual real GDP is above trend output.","mcqOptions":[{"text":"A positive output gap occurs when actual real GDP is above trend output.","correct":true,"explanation":"The output gap compares actual real GDP with trend output. It is positive when the economy is producing above its estimated long-run trend level."},{"text":"A negative output gap occurs when actual real GDP is above trend output.","correct":false,"explanation":"The sign is reversed here: output above trend creates a positive gap. A negative output gap occurs when actual real GDP is below trend output."},{"text":"A positive output gap occurs when actual real GDP is below trend output.","correct":false,"explanation":"Output below trend indicates spare capacity and therefore a negative gap. A positive output gap requires actual real GDP to exceed trend output."},{"text":"A zero output gap occurs when actual real GDP is above trend output.","correct":false,"explanation":"A zero gap means actual real GDP equals trend output. When actual GDP is above trend, the difference is positive, so the gap is described as positive."}]},{"id":"9dc0d704-549c-4190-acd3-c6f5b521f79b","cardType":"basic","points":1,"front":"When is the output gap negative?","back":"A negative output gap occurs when actual real GDP is below trend output.","mcqOptions":[{"text":"A negative output gap occurs when actual real GDP is below trend output.","correct":true,"explanation":"Trend output represents the economy’s sustainable level of production. When actual real GDP is lower, unused productive capacity creates a negative output gap."},{"text":"A negative output gap occurs when actual real GDP is above trend output.","correct":false,"explanation":"Confusing below-trend with above-trend production reverses the output gap’s sign. Actual real GDP above trend output creates a positive output gap, while GDP below trend creates a negative one."},{"text":"A negative output gap occurs when actual real GDP is equal to trend output.","correct":false,"explanation":"Equality between actual and trend output means there is no output gap. A negative gap specifically requires actual real GDP to be below trend output."},{"text":"A negative output gap occurs when actual real GDP grows more slowly than trend output.","correct":false,"explanation":"A slower growth rate may cause a negative gap eventually, but it does not establish one by itself. The gap is negative only when actual real GDP is below trend output."}]},{"id":"8c29a301-6e17-44a1-81e0-c05e662b103a","cardType":"basic","points":3,"front":"What is the difference between a slowdown and a recession?","back":"A slowdown has slower but positive growth; a recession has negative growth, so real GDP falls.","mcqOptions":[{"text":"A slowdown has slower but positive growth; a recession has negative growth, so real GDP falls.","correct":true,"explanation":"During a slowdown, real GDP continues to increase but at a reduced rate. During a recession, negative growth means the level of real GDP actually declines."},{"text":"A slowdown has faster but positive growth; a recession has zero growth, so real GDP is unchanged.","correct":false,"explanation":"This confuses a slowdown with an acceleration and a recession with stagnation. A slowdown retains slower positive growth, whereas a recession involves negative growth and falling real GDP."},{"text":"A slowdown has slower and negative growth; a recession has positive growth, so real GDP rises.","correct":false,"explanation":"The signs have been reversed. Slower positive growth characterises a slowdown, while negative growth characterises a recession and causes the level of real GDP to fall."},{"text":"A slowdown has zero economic growth; a recession has slower growth, so real GDP rises.","correct":false,"explanation":"This wrongly treats stagnation as a slowdown and continued growth as a recession. A slowdown has slower but positive growth; a recession has negative growth, reducing real GDP."}]},{"id":"47b6f44e-82c2-4e7a-9277-f04b9d7be281","cardType":"basic","points":1,"front":"What is the main cause of short-run trade-cycle fluctuations?","back":"Short-run fluctuations are driven mainly by swings in aggregate demand.","mcqOptions":[{"text":"Short-run fluctuations are driven mainly by swings in aggregate demand.","correct":true,"explanation":"Changes in consumption, investment, government spending or net exports shift aggregate demand, producing short-run variations in real output and employment over the trade cycle."},{"text":"Short-run fluctuations are driven mainly by swings in aggregate supply.","correct":false,"explanation":"Supply shocks can affect the economy, but standard trade-cycle analysis attributes most short-run fluctuations to aggregate demand. Demand swings change firms’ output and employment decisions."},{"text":"Short-run fluctuations are driven mainly by swings in productive capacity.","correct":false,"explanation":"Productive capacity generally changes gradually and helps determine long-run trend output. Short-run cyclical movements are driven mainly by faster-changing swings in aggregate demand."},{"text":"Short-run fluctuations are driven mainly by swings in population growth.","correct":false,"explanation":"Population growth affects the economy’s labour supply and long-run productive potential rather than causing typical short-run cycles. These fluctuations arise mainly from changes in aggregate demand."}]},{"id":"0e6e728c-2964-46b2-aeea-009a4e0df5b1","cardType":"basic","points":2,"front":"How can changes in business and consumer confidence affect the trade cycle?","back":"Changes in confidence, or Keynes's animal spirits, alter consumption and investment.","mcqOptions":[{"text":"Changes in confidence, or Keynes's animal spirits, alter consumption and investment.","correct":true,"explanation":"Greater optimism encourages households to consume and firms to invest, raising aggregate demand. Pessimism reduces both, so changing animal spirits can reinforce booms and downturns."},{"text":"Changes in confidence, or Keynes's liquidity preference, alter taxation and government spending.","correct":false,"explanation":"Liquidity preference concerns the desire to hold money, not confidence-driven consumption and investment. Keynes called shifts in business and consumer confidence animal spirits."},{"text":"Changes in confidence, or Keynes's animal spirits, alter exports and import prices.","correct":false,"explanation":"Animal spirits do describe confidence, but their direct cyclical effect is through household consumption and business investment. Exports and import prices depend more directly on foreign demand and exchange rates."},{"text":"Changes in confidence, or Keynes's money illusion, alter saving and tax revenue.","correct":false,"explanation":"Money illusion means responding to nominal rather than real values, so it is not Keynes’s term for confidence. Animal spirits change consumption and investment, affecting aggregate demand."}]},{"id":"194de565-22bc-4370-98c4-12666bab95a0","cardType":"basic","points":2,"front":"How do the multiplier and accelerator affect trade-cycle fluctuations?","back":"The multiplier and accelerator amplify an initial demand change into larger swings in investment and output.","mcqOptions":[{"text":"The multiplier and accelerator amplify an initial demand change into larger swings in investment and output.","correct":true,"explanation":"The multiplier magnifies autonomous spending changes through induced consumption, while the accelerator links changing output to investment. Together they make cyclical movements in demand and output larger."},{"text":"The multiplier and accelerator reduce an initial demand change into smaller swings in investment and output.","correct":false,"explanation":"This reverses their cyclical effect. Multiplier rounds of spending and accelerator-induced investment amplify an initial demand change, creating larger rather than smaller movements in output."},{"text":"The multiplier and accelerator amplify an initial supply change into larger swings in inflation and imports.","correct":false,"explanation":"The mechanisms chiefly transmit changes in aggregate demand through consumption, investment and output. Treating them as amplifiers of supply changes and imports misidentifies both their trigger and main effects."},{"text":"The multiplier and accelerator convert an initial demand change into equal swings in taxation and exports.","correct":false,"explanation":"Neither mechanism guarantees equal changes or operates mainly through taxation and exports. They amplify demand changes through induced consumption and investment, causing larger fluctuations in output."}]},{"id":"c72b3bde-a12c-4058-a74e-26fdb662e445","cardType":"basic","points":2,"front":"How can the credit cycle influence the trade cycle?","back":"Cheap lending can fuel a boom, while a credit crunch can deepen a downturn.","mcqOptions":[{"text":"Cheap lending can fuel a boom, while a credit crunch can deepen a downturn.","correct":true,"explanation":"Low-cost, readily available credit supports borrowing, consumption and investment during an expansion. Restricted lending then reduces spending and investment, potentially intensifying a cyclical downturn."},{"text":"Cheap lending can fuel a downturn, while a credit crunch can strengthen a recovery.","correct":false,"explanation":"This reverses the usual transmission of credit conditions. Cheap credit stimulates consumption and investment and can fuel a boom, whereas a credit crunch restricts spending and deepens a downturn."},{"text":"Cheap lending can fuel a recession, while a credit crunch can increase investment spending.","correct":false,"explanation":"Cheap lending normally encourages borrowing and spending rather than recession. A credit crunch makes finance scarcer or costlier, reducing investment and potentially worsening a downturn."},{"text":"Cheap lending can fuel a boom, while a credit crunch can accelerate economic growth.","correct":false,"explanation":"The first relationship is correct, but the second is reversed. A credit crunch constrains household and business borrowing, so it tends to reduce demand and deepen a downturn."}]},{"id":"26788215-7427-4c0b-bcf0-189aa0abe20d","cardType":"cloze","points":null,"front":"Automatic stabilisers are built-in features of [ ] that dampen the trade cycle without a new policy decision.","back":"Automatic stabilisers are built-in features of government spending and taxation that dampen the trade cycle without a new policy decision.","mcqOptions":[{"text":"government spending and taxation","correct":true,"explanation":"Tax receipts and some government spending change automatically with national income. These fiscal features moderate changes in aggregate demand without requiring the government to announce a new policy."},{"text":"interest rates and money supply","correct":false,"explanation":"Interest rates and money supply are monetary policy instruments that usually require central-bank decisions. Automatic stabilisers instead operate through government spending and taxation as economic activity changes."},{"text":"exchange rates and trade barriers","correct":false,"explanation":"Exchange rates and trade restrictions are not the built-in fiscal mechanisms meant here. Automatic stabilisers are features of government spending and taxation that respond automatically to income changes."},{"text":"wages and production costs","correct":false,"explanation":"Wages and production costs influence aggregate supply but are not automatic fiscal stabilisers. The relevant built-in features belong to government spending and taxation and adjust with the economic cycle."}]},{"id":"9314f4b1-b6d2-4542-9214-c3901cf0991e","cardType":"cloze","points":null,"front":"During a boom, progressive income taxes restrain demand because rising incomes push households into [ ].","back":"During a boom, progressive income taxes restrain demand because rising incomes push households into higher tax bands.","mcqOptions":[{"text":"higher tax bands","correct":true,"explanation":"Under progressive taxation, higher incomes are charged higher marginal tax rates. This automatically removes a greater share of additional income, moderating consumption and aggregate demand during a boom."},{"text":"lower tax bands","correct":false,"explanation":"This reverses the operation of progressive taxation. Rising incomes move households into higher tax bands, increasing tax deductions from additional income and restraining growth in aggregate demand."},{"text":"higher benefit bands","correct":false,"explanation":"Benefits normally fall as employment and incomes rise during a boom; households are not pushed into higher benefit bands. Progressive income taxes instead move them into higher tax bands."},{"text":"lower income brackets","correct":false,"explanation":"Rising income does not move households into lower brackets. It places more income in higher tax bands, raising the marginal tax burden and automatically restraining demand."}]},{"id":"1730b403-cfb2-45ae-860e-6d80e3bd382d","cardType":"cloze","points":null,"front":"During a recession, tax receipts fall automatically while [ ], cushioning household incomes and demand.","back":"During a recession, tax receipts fall automatically while benefit payments rise, cushioning household incomes and demand.","mcqOptions":[{"text":"benefit payments rise","correct":true,"explanation":"During a recession, unemployment and entitlement claims usually increase, so benefit payments rise automatically. This supports household incomes and demand without requiring a new fiscal policy decision."},{"text":"benefit payments fall","correct":false,"explanation":"Benefit payments generally rise during a recession as more people qualify for unemployment-related support. A fall would reduce household incomes and weaken demand, rather than cushioning the downturn."},{"text":"tax payments rise","correct":false,"explanation":"Tax receipts usually fall in a recession because incomes, profits and spending decline. Tax payments rising would withdraw demand, whereas rising benefit payments support incomes automatically."},{"text":"government investment falls","correct":false,"explanation":"Government investment is not the automatic stabiliser described here and may require a discretionary policy decision. The relevant automatic response is that benefit payments rise during a recession."}]},{"id":"5dbcd541-8dea-4d54-8101-068b810813e1","cardType":"cloze","points":null,"front":"Automatic stabilisers respond faster than discretionary fiscal policy because they act instantly and require no [ ].","back":"Automatic stabilisers respond faster than discretionary fiscal policy because they act instantly and require no new legislation or policy decision.","mcqOptions":[{"text":"new legislation or policy decision","correct":true,"explanation":"Automatic stabilisers operate through existing tax and benefit rules, so they respond immediately when economic conditions change. Discretionary fiscal policy usually requires a new legislative or policy decision."},{"text":"a parliamentary vote","correct":false,"explanation":"A parliamentary vote may be needed for discretionary fiscal measures, but automatic stabilisers do not depend on one. They operate immediately under existing tax and benefit arrangements."},{"text":"new tax revenue","correct":false,"explanation":"Automatic stabilisers do not require new tax revenue before operating. Tax receipts and benefit payments adjust automatically, while the correct distinction is that no new legislation or policy decision is needed."},{"text":"an economic forecast","correct":false,"explanation":"Governments may use forecasts when designing discretionary policy, but automatic stabilisers do not wait for one. Existing tax and benefit rules respond without new legislation or a policy decision."}]},{"id":"a58d45c8-ea9f-4c8a-b4ae-29c32378c05a","cardType":"cloze","points":null,"front":"The strength of automatic stabilisers depends partly on the size of the [ ] and the progressiveness of taxes and benefits.","back":"The strength of automatic stabilisers depends partly on the size of the government sector and the progressiveness of taxes and benefits.","mcqOptions":[{"text":"government sector","correct":true,"explanation":"A larger government sector usually means taxes and benefits represent a greater share of the economy, so their automatic changes have a stronger effect on household incomes and demand."},{"text":"private sector","correct":false,"explanation":"The private sector's size is not the factor identified here as determining the strength of automatic stabilisers. The relevant factor is the size of the government sector, alongside tax and benefit progressiveness."},{"text":"financial sector","correct":false,"explanation":"The financial sector can influence credit and spending, but it is not the sector-size measure in this explanation of automatic stabilisers. The correct term is government sector."},{"text":"export sector","correct":false,"explanation":"The export sector affects aggregate demand and the trade cycle, but its size does not directly determine the strength of automatic tax and benefit responses. That depends partly on the government sector."}]},{"id":"fd519a70-8239-446c-bed6-023c5e4c7f7b","cardType":"cloze","points":null,"front":"Automatic stabilisers only [ ] the trade cycle; a deep recession may still require discretionary fiscal stimulus.","back":"Automatic stabilisers only cushion the trade cycle; a deep recession may still require discretionary fiscal stimulus.","mcqOptions":[{"text":"cushion","correct":true,"explanation":"Automatic stabilisers moderate fluctuations by supporting demand in downturns and restraining it during booms. They cushion the trade cycle, but may be insufficient to overcome a deep recession."},{"text":"amplify","correct":false,"explanation":"Automatic stabilisers are designed to reduce, not amplify, fluctuations in economic activity. They cushion the trade cycle by supporting demand during recessions through existing tax and benefit rules."},{"text":"reverse","correct":false,"explanation":"Automatic stabilisers can moderate a recession but do not necessarily reverse the entire downturn. The correct description is that they cushion the trade cycle, with deeper slumps potentially needing discretionary stimulus."},{"text":"eliminate","correct":false,"explanation":"Automatic stabilisers cannot guarantee that recessions disappear, because their support may be too small during a deep downturn. They cushion the trade cycle rather than eliminate it."}]}]}],"examCountdown":null,"heading":"9.2.3 business (trade) cycle","title":"9.2.3 business (trade) cycle Flashcards","topbar":{"backHref":"/international-a-level/economics/cie/flashcards"},"topicSidebar":"$L90"}]}],"topicId":"696d67ae-8dbd-4664-9d32-2f45bdee7ee8","walled":"$L91"}],"$L92","$L93"]