A22.1 Business Cycle

What characterises an economic boom?

• High levels of unemployment

• High levels of consumer and business confidence

• Decreasing consumer spending

• Low levels of investment

Answer explanation

An economic boom is characterized by high levels of consumer and business confidence, leading to increased spending and investment. This contrasts with high unemployment, decreasing spending, and low investment, which indicate economic downturns.

During an economic boom, what tends to happen to inflation?

• Inflation decreases

• Inflation remains stable

• Inflation increases

• Inflation is unaffected

Answer explanation

During an economic boom, demand for goods and services increases, leading to higher prices. This results in inflation rising, making "Inflation increases" the correct choice.

Which of the following is a possible positive effect on businesses during a boom?

• Decreased demand for consumer durables

• High levels of competition

• Increased demand and high prices leading to higher profits

• Reduced investment in new plant and machinery

Answer explanation

During a boom, increased demand for goods often leads to higher prices, which can significantly boost profits for businesses. This positive effect contrasts with decreased demand or reduced investment, making it the correct choice.

What is a common business strategy during a recession?

• Increase stock levels

• Close unprofitable areas of business

• Expand production capacity

• Increase marketing spending on luxury goods

Answer explanation

During a recession, businesses often close unprofitable areas to reduce costs and focus on core operations. This strategy helps maintain financial stability, unlike increasing stock or expanding production, which can lead to greater losses.

What is the official definition of a recession?

• A fall in GDP for one quarter

• Two successive quarters of negative GDP growth

• A rise in unemployment for one quarter

• A rise in inflation for two consecutive quarters

Answer explanation

A recession is officially defined as a fall in GDP for two consecutive quarters. This indicates a significant decline in economic activity, distinguishing it from short-term fluctuations.

Which of the following is a possible negative effect on businesses during a recession?

• Increased consumer confidence

• Rising demand for luxury goods

• Falling demand leading to excess stock

• High levels of business investment

Answer explanation

During a recession, consumer spending typically decreases, leading to falling demand for products. This can result in excess stock for businesses, as they are unable to sell their inventory, negatively impacting their financial health.

During a boom, what is a likely business reaction to high consumer demand?

• Reduce production capacity

• Invest in plant and machinery to increase capacity

• Decrease marketing efforts

• Lay off staff

Answer explanation

During a boom, high consumer demand typically leads businesses to invest in plant and machinery to increase production capacity, ensuring they can meet the demand. Reducing capacity or laying off staff would be counterproductive.

What tends to happen to unemployment levels during a recession?

• Unemployment levels decrease

• Unemployment levels remain stable

• Unemployment levels increase

• Unemployment levels are unaffected

Answer explanation

During a recession, economic activity slows down, leading to business closures and layoffs. As a result, unemployment levels tend to increase as more people lose their jobs and fewer new jobs are created.

Which of the following is a strategy businesses might use during a recession to manage cash flow?

• Increase stock levels

• Negotiate with unions to increase pay

• Improve credit control

• Expand into new luxury markets

Answer explanation

Improving credit control helps businesses manage cash flow by ensuring timely payments from customers, reducing the risk of bad debts, and maintaining liquidity during a recession. The other options may not effectively address cash flow issues.

What is a potential benefit for businesses during a recession?

• Higher costs of materials

• Easier recruitment of new staff

• Increased competition

• Higher consumer spending on luxury goods

Answer explanation

During a recession, businesses may find it easier to recruit new staff as unemployment rises, leading to a larger pool of available talent. This can help companies fill positions with qualified candidates more efficiently.