Lesson 2.5.3
2.5.3 The trade (business) cycle Quiz: Pearson Edexcel Economics A, Unit 2
20 questions
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Lesson 2.5.3, The trade (business) cycle: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 2: Theme 2: The UK economy – performance and policies, written with Revision Ninja.
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The 20 questions
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The trade (business) cycle refers to:
- a regular, fixed-length pattern of economic growth that repeats exactly every five years
- fluctuations in real output around its trend, with alternating periods of expansion and contraction
- changes in the price level caused only by monetary policy
- seasonal changes in the level of employment across the year
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The main phases of the trade cycle, in order, are:
- trough, stagnation, boom and seasonal recovery, which describes a cycle that repeats each year with the same length in every economy
- boom (peak), recession (contraction), trough and recovery (expansion)
- recovery, deflation, peak and stagnation, which describes a cycle that moves from falling prices to a long period of flat output
- recession, boom, trough and inflation, where a trough is followed by a boom and then by a period of rising prices and wages
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Which is a characteristic of a boom?
- output is above trend, unemployment is low, and inflationary pressure tends to build
- output is at its lowest point and firms are scrapping equipment
- output is below trend, unemployment is rising and inflation is falling
- output is stable, unemployment is high and wages are falling
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Which is a characteristic of a recession?
- output rises sharply while the price level falls, because strong growth in supply pushes prices down as firms compete for buyers
- output rises steadily and unemployment falls to its lowest level, because firms expand production and hire more workers each quarter
- output stays constant at potential with no change in unemployment, so the economy is in balance and firms face no pressure to cut jobs
- output falls for at least two consecutive quarters, and unemployment tends to rise
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A trough in the trade cycle is best described as:
- the point at which the economy reaches full employment for the first time
- the point at which inflation is at its highest level
- the lowest point of output before recovery begins
- the highest point of output before a recession begins
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Which factor is most likely to cause a downturn in the trade cycle?
- a sharp fall in business and consumer confidence that reduces spending and investment
- a sharp rise in consumer confidence that raises household spending
- a fall in the price of imported goods that boosts real incomes
- a rise in the productive capacity of the economy from new technology
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Which of these best describes the effects of a recession on government finances?
- tax revenues rise, reducing the budget deficit automatically
- welfare spending falls as unemployment rises
- the budget moves into surplus because the government borrows less
- tax revenues fall and welfare spending rises, widening the budget deficit
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The accelerator effect helps explain the trade cycle because:
- consumption is the only component that changes over the cycle, so investment remains fixed and cannot make the downturn worse
- investment rises whenever demand falls, which stabilises the economy, because firms build new capacity to replace the output they have lost
- investment depends only on interest rates, so the cycle cannot amplify, since changes in demand have no effect on firms' investment
- a fall in the rate of growth of demand can cause a sharp fall in investment, amplifying the downturn
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A possible explanation for a boom in the trade cycle is:
- a rise in unemployment that reduces the number of workers in the economy, which lowers costs and raises output in the period
- a sharp fall in consumer confidence that reduces demand for goods, which lowers prices and so creates a boom in real spending
- a sustained period of low interest rates and easy credit that boosts consumer and business spending
- a sustained rise in interest rates that discourages all borrowing and spending, which lifts saving and pushes output up to a higher trend
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Which statement best explains why trade cycles are difficult to forecast precisely?
- Cycles follow a fixed, known pattern every year, so they are easy to forecast, since each boom and recession lasts the same length
- Cycles depend on many interacting factors, including confidence, global shocks and policy responses, which are hard to predict
- Cycles are caused only by changes in the price of oil, which is predictable from futures markets, so the timing of every cycle is known
- Cycles do not affect output or unemployment, so they cannot be forecast, because their only effects are on financial markets
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Which statement about output above trend during a boom is most accurate?
- Output above trend always reduces inflation because demand is high, which allows firms to spread fixed costs and cut their prices
- Output above trend can lead to skill shortages and higher wages if the economy is operating near capacity
- Output above trend has no effect on wages or prices in any economy, because firms and workers adjust instantly to any demand change
- Output above trend implies that potential output has fallen, because the economy can only produce above trend when capacity has shrunk
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An economy's real GDP grows by 4% in one year and by 1% in the next, after a recession. What is the most likely interpretation?
- the economy is in a recovery phase that is still below its previous peak but growing
- the economy has entered a recession that is worsening, because growth has slowed sharply and output is now falling in real terms
- the economy has permanently reduced its potential output, because the slowdown shows that capacity has been lost for good
- the economy is at its peak and about to enter a boom, because growth has risen above trend and the cycle is at its highest point
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Which of the following is a common policy response to a recession in the trade cycle?
- a rise in taxes on consumers to restrain spending
- a cut in interest rates or an increase in government spending to boost aggregate demand
- a cut in government spending to reduce the budget deficit during the slump
- a rise in interest rates to reduce borrowing and cool demand
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Which statement best describes the effect of a recession on the output gap?
- a recession creates a positive output gap, as demand falls below supply
- a recession creates a zero output gap by definition
- a recession has no effect on the output gap since potential output also falls
- a recession creates a negative output gap, as actual output falls below potential
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Which of these is a characteristic of the trade cycle's effect on unemployment?
- unemployment tends to rise in recessions and fall in booms, though with a lag
- unemployment rises in booms because workers leave the labour market
- unemployment falls in recessions because firms hire more workers
- unemployment is unaffected because it depends only on structural factors
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Which statement best evaluates the view that the trade cycle has been eliminated by modern policy?
- Cycles have become irrelevant because all economies now grow at exactly the trend rate, so output never moves away from its path
- Policy has eliminated cycles completely, so recessions are no longer possible, because central banks can always offset any shock to demand
- Policy can moderate cycles but cannot remove them, as shocks and confidence changes continue to cause fluctuations
- Policy has no effect on the cycle, which is determined entirely by the weather and seasonal patterns of demand across the year
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A recession with a negative output gap is most likely to be accompanied by:
- rising real output above potential as firms expand rapidly
- rising inflationary pressure caused by excess demand
- falling inflationary pressure and weaker wage growth
- a shortage of skilled labour in most sectors
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Which of the following best describes a 'soft landing' in the trade cycle?
- a slowdown from a boom to steady growth without a recession or sharp rise in unemployment
- a recession that ends immediately with no change in output or prices, so the downturn leaves no lasting effects on jobs or living standards
- a sudden collapse in output that leads directly into a deep depression
- a boom that continues indefinitely without any rise in inflation
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A country's trend growth rate is 2.5% per year. Output grows by 5% in one year. Which statement is most accurate?
- the trend growth rate has fallen to 5% per year, because the economy's actual growth rate always determines the trend used in forecasts
- output is below trend, so the economy is in recession, because growth above the usual 2.5% shows that output has fallen behind its path
- output has returned to its long-run trend exactly, since growth of 5% matches the trend rate when measured over two periods together
- output is above trend in that year, which could generate inflationary pressure
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Why might the trade cycle affect firms' investment decisions?
- Firms invest the same amount in every phase of the cycle regardless of demand, because capital spending follows long-term plans only
- Firms invest more when demand and confidence are strong and less when they fall, so investment amplifies the cycle
- Investment decisions are unaffected because they depend only on government policy, so the cycle has no effect on firms' spending plans
- Firms invest most during recessions because costs are at their lowest, so they buy equipment and buildings at the bottom of the downturn
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