2.1.5

Business Cycles

Test yourself on Business Cycles

Test your knowledge with free interactive questions on Seneca — used by over 10 million students.

Business Cycles

The business cycle is the natural fluctuation of the economy between recovery and recession. A recession lasts from peak to trough, and an economic upswing runs from trough to peak.

Recession

Recession

  • In the trough, the prices of factors of production, such as labor and land, have fallen so far that some entrepreneurs think the only way is up. So some entrepreneurs think the economy has ‘bottomed out’ and it is the best time to buy and invest.
  • The lowest point of a recession, before a recovery begins, is the trough.
Recovery

Recovery

  • Eventually, this recovery gathers momentum and turns into a full expansion:
  • As investment increases, real GDP grows. Unemployment falls as jobs are created and workers are needed to produce goods and services.
  • So incomes rise and consumption rises too, creating a further need for investment and workers. As consumers buy more things like houses, house prices also begin to rise.
  • As profits rise, so do firm’s share prices. Animal spirits (confidence) are rising with these variables too.
Boom or peak

Boom or peak

  • During a boom:
    • Workers are working over-time and wages are rising.
    • Inwards migration may rise attracted by the work.
    • Demand for luxury goods is high.
    • Demand for imports is high – raw materials to produce other goods and luxury
  • The government gets more tax revenue and is spending less on benefits, so the fiscal deficit reduces.
  • We call the highest point of the economy, before the recession begins, the peak. This is a turning point of the business cycle.
Stagnation

Stagnation

  • Once the boom is in full flow, eventually it starts to become unsustainable. People start to worry that house prices and share prices are too high. They no longer reflect the real value of these assets but instead are speculative bubbles (over optimistic hype).
  • Some firms have over-invested as a result and returns on their investment starts to be below forecast. Suddenly, some entrepreneurs get cold feet and start to worry.
Return to recession

Return to recession

  • If prices start to fall significantly, firms profits will fall as demand collapses. Now, workers will be fired and unemployment will rise. Government spending on welfare will rise while tax revenue from firms and consumers will fall.
  • Consumers may try to save money for a rainy day, reducing consumption further.
  • As firms profits fall, some make losses and go bankrupt. This means some banks have made loans that don’t get repaid. This harms confidence and reduces aggregate demand. Firms will need fewer workers and will reduce investment further.
  • And the cycle repeats as the economy reaches a new trough (a turning point of the business cycle).
Jump to other topics
1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand1.1.2Diminishing Marginal Returns1.1.3Supply1.1.4Market Equilibrium1.1.5Price Mechanism1.1.6Consumer & Producer Surplus1.1.7IB Multiple Choice - Demand1.1.8IB Multiple Choice - Supply
1.2

Elasticity

1.2.1Elasticities of Demand1.2.2Factors Affecting Price Elasticity of Demand1.2.3Elasticity of Supply1.2.4Price Elasticity of Supply1.2.5IB Multiple Choice - Price Elasticity of Demand1.2.6IB Multiple Choice - Price Elasticity of Supply1.2.7IB Multiple Choice - Other Elasticities
1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies1.3.2Application Question - Taxing Prices or Quantities1.3.3Subsidies & Price Controls1.3.4Deadweight Loss & Government Intervention1.3.5Elasticity & Tax Incidence1.3.6IB Multiple Choice - Government Intervention
1.4

Market Failure

1.4.1Types of Market Failure1.4.2Introduction to Externalities1.4.3Negative Externalities1.4.4Policy for Negative Externalities1.4.5Positive Externalities1.4.6The Deadweight Welfare Loss of Externalities1.4.7Case Study - The Externalities of Education1.4.8Public Goods & the Free-Rider Problem1.4.9Asymmetric Information1.4.10End of Topic Test - Market Failure1.4.11Application Questions - Market Failure
1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures
2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income2.1.2Defining GDP2.1.3Limitations of GDP2.1.4IB Multiple Choice - Economic Indicators2.1.5Business Cycles2.1.6Output Gaps
2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve2.2.2Components of Aggregate Demand2.2.3Shape of the Aggregate Demand Curve2.2.4Shifts in Aggregate Demand2.2.5IB Multiple Choice - Aggregate Demand2.2.6Short & Long-Run Aggregate Supply2.2.7Alternative Models of LRAS2.2.8Equilibrium in the AD-AS Model2.2.9Output Gaps & the AD-AS Model
2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment2.3.2Limitations of Unemployment2.3.3Types of Unemployment2.3.4Causes & Impact of Unemployment2.3.5Defining Inflation2.3.6Measuring Inflation2.3.7Use of Index Numbers2.3.8The Consumer Price Index2.3.9Consequences of Inflation2.3.10Causes of Inflation2.3.11Inflation & Unemployment Tradeoff2.3.12The Short-Run Phillips Curve2.3.13The Long-Run Phillips Curve
2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth2.4.2Determinants of Productivity2.4.3Economic Growth & Productivity2.4.4Absolute & Relative Poverty2.4.5Inequality2.4.6Inequality 22.4.7Lorenz Curve2.4.8Government Policy on Poverty2.4.9End of Topic Test - Poverty & Inequality2.4.10Application - Inequality & Poverty
2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy2.5.2Fiscal Policy and AD-AS Model2.5.3Fiscal Policy Lags2.5.4Automatic Stabilizers2.5.5IB Multiple Choice - Fiscal Policy
2.6

Monetary Policy

2.6.1Objectives of Monetary Policy2.6.2Monetary Policy Implementation2.6.3Monetary Policy & AD-AS Model2.6.4Monetary Policy Lags & Pitfalls
2.7

Supply-Side Policies

2.7.1Supply-Side Policies2.7.2Supply-Side Policies 2
3

The Global Economy

3.1

International Trade

3.1.1Globalisation3.1.2Globalisation for LEDCs3.1.3Globalisation for MEDCs3.1.4Comparative Advantage & Trade3.1.5Protectionism3.1.6Arguments for Protectionism3.1.7Arguments Against Protectionism3.1.8End of Topic Test - Globalisation & Trade3.1.9Case Study - Globalisation & Trade
3.2

Exchange Rates

3.2.1Floating Exchange Rates3.2.2Fixed Exchange Rate3.2.3Effect of a Stronger & Weaker Dollar
3.3

The Balance of Payments

3.3.1Balance of Payments3.3.2Balance of Payments 23.3.3FDI & Reducing a BoP Deficit
3.4

Economic Integration

3.4.1Customs Unions & WTO3.4.2Merged Currency
3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage3.5.2Gains from Trade3.5.3Terms of Trade3.5.4IB Multiple Choice - Comparative Advantage & Trade
3.6

Economic Development

3.6.1Factors Influencing Growth & Development3.6.2International Institutions3.6.3Measures of Development3.6.4Barriers to Development3.6.5Case Study - The Bottom Billion3.6.6End of Topic Test - Emerging & Developing
3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies3.7.2Development Strategies3.7.3Development Promotion Policies3.7.4End of Topic Test - Growth & Global Development3.7.5Application Questions -Growth & Global Development
3.8

The Role of International Trade

3.8.1International Institutions3.8.2End of Topic Test - Globalisation & Trade
3.9

The Role of Foreign Aid

3.9.1Aid3.9.2Limitations of Aid3.9.3Support for Aid3.9.4Application Questions - Developing Countries

Practice questions on Business Cycles

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    Which of these are features of recessions?True / false
  2. 2
    In which period would you expect to see the return of 'animal spirits' to the economy?Multiple choice
  3. 3
    In which period do people start to think that share prices and house prices are too high?Multiple choice
Answer all questions on Business Cycles

Unlock your full potential with Seneca Premium

  • Unlimited access to 10,000+ open-ended exam questions

  • Mini-mock exams based on your study history

  • Unlock 800+ premium courses & e-books

Get started with Seneca Premium

IB Multiple Choice - Economic Indicators

Output Gaps