Exercises: Phases of the Cycle and Irish Data

Define the business cycle and name its four phases: boom, recession, slump and recovery. Describe one feature of each phase.

Identify the phase of the cycle suggested by each description:

1. a) Unemployment is very low, inflation is rising and house prices are surging.

1. b) Real GDP has fallen for two consecutive quarters.

1. c) Output is at a very low level, unemployment is high and business confidence is weak.

1. d) Real GDP is growing again and unemployment is starting to fall.

Real GDP (in €billion) for an economy was 250 in Year 1, 260 in Year 2, 255 in Year 3 and 245 in Year 4.

1. a) Calculate the percentage growth rate in each year.

1. b) Identify the years of positive and negative growth.

1. c) State which phase the economy appears to be in during Year 4.

The table shows data for an economy:

1. a) Assign a phase of the cycle to each year.

1. b) Explain why unemployment often peaks after GDP growth has begun to recover.

1. c) Explain why inflation falls during the downturn.

Government data for an economy show:

1. a) Calculate the budget balance in each year.

1. b) Calculate the percentage change in tax revenue and the increase in national debt between Year 1 and Year 3.

1. c) Explain the effect of a recession on tax revenue and on spending on unemployment benefits (automatic stabilisers).

During a boom, house prices in an economy rise by 15% a year for four years.

1. a) Calculate the total percentage rise in house prices over the four years, to one decimal place.

1. b) Explain how a rapid rise in property prices and credit can contribute to a bust.

1. c) Describe two ways in which a government or central bank might try to moderate a boom.

The Irish economy experienced rapid growth in the early 2000s, a sharp collapse after 2008 and a recovery from about 2013. Using your knowledge of that period:

1. a) Describe the typical pattern of GNI*, unemployment and the government's budget balance across the boom, slump and recovery.

1. b) Explain two causes of the downturn after 2008, including domestic and international factors.

1. c) Explain why GDP can give a misleading picture of Irish national income and why GNI* is preferred.

1. d) Discuss whether fiscal policy was pro-cyclical in the boom and evaluate the lessons for policy.

An economy has the following data:

1. a) Calculate real GDP growth for years 2 to 6.

1. b) Identify the phase of the cycle in each year and justify your answers.

1. c) Explain why the debt ratio rose even in Year 5 when GDP began to rise.

1. d) Discuss the policy dilemma facing government in Years 4 and 5 between supporting growth and controlling debt.

A small open economy, like Ireland, is heavily dependent on exports and foreign direct investment.

1. a) Explain how a downturn among its main trading partners can lead to a recession domestically.

1. b) Explain why the multiplier effect may be smaller in a small open economy, referring to marginal propensity to import.

1. c) Evaluate two policies the government could use during a slump, and explain constraints on each.

1. d) Explain why the business cycle in a small open economy can differ in timing and severity from that of larger economies.