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

  1. 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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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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