The Economic Cycle | Edexcel A-Level Economics B (9EB0)

The Economic Cycle

190 questions
13 subtopics
Theme 2: the wider economic environment
Paper 2 and Paper 3

The Economic Cycle is examined in Paper 2, Competing in the global economy, and in Paper 3, The economic environment and business.

It covers the economic cycle: boom, slowdown, recession and recovery, implications of the economic cycle for firms, the circular flow of income, injections and withdrawals, aggregate demand and its components, aggregate supply, input costs and productivity, inflation, deflation and disinflation, price indices and the rate of inflation, real and nominal values, constant and current prices, demand-pull and cost-push inflation, the impact of inflation on firms and individuals, employment, underemployment and the measurement of unemployment, the causes of unemployment and the impact of unemployment on firms and individuals.

Sample questions from The Economic Cycle

Answer each one closed book first, then open the answer.

The economic cycle: boom, slowdown, recession and recovery

What is a negative output gap?

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A negative output gap exists when actual output is below productive potential, leaving spare capacity and unemployed resources.
Implications of the economic cycle for firms

Explain how the economic cycle affects a firm's investment decisions.

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Investment depends on expected future demand and on the cost and availability of finance, and both improve in a boom and deteriorate in a recession.
Aggregate demand and its components

Explain how a rise in house prices affects consumption.

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Homeowners feel wealthier and can borrow against the higher value of their property, so they save less and spend more out of current income, which is the wealth effect.
Aggregate supply, input costs and productivity

Explain how rising productivity allows wages to rise without inflation.

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If output per worker rises as fast as pay, the labour cost of producing each unit is unchanged, so firms have no need to raise prices.
Price indices and the rate of inflation

Name two ways the Retail Prices Index differs from the Consumer Prices Index.

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The Retail Prices Index includes housing costs such as mortgage interest payments and council tax, and it uses a different averaging formula, both of which usually make it the higher figure.
Real and nominal values, constant and current prices

A saver earns 3% interest in a year when inflation is 4%. Calculate the real return.

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The real return is about −1%, so the money loses purchasing power.
The impact of inflation on firms and individuals

Why does a firm exporting to a low-inflation country suffer most from domestic inflation?

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Its costs and prices are rising while its rivals' are not, so the price gap widens each year and it must either lose sales or absorb the difference in its margin.
Employment, underemployment and the measurement of unemployment

Why is the claimant count usually lower than the International Labour Organisation measure?

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Some people who are genuinely seeking work are not entitled to claim, for example because a partner's income or their own savings disqualify them.

The 13 subtopics

One subtopic is one session. Work down the list.

Subtopic	What it covers	Questions
The economic cycle: boom, slowdown, recession and recovery	The economic cycle and its four phases, the trend rate of growth, the definition of recession, positive and negative output gaps, the features of a boom and a recession, government finances, depression, business confidence and the accelerator effect, persistent recessions, overheating, and slowdowns.	15
Implications of the economic cycle for firms	Sales revenue in a recession and the firms least affected, inferior goods, capital goods against consumer goods, cash flow, how firms respond to a recession, keeping skilled workers and labour hoarding, costs and cash flow in a boom, investment and credit over the cycle, and luxury against discount retailers.	14
The circular flow of income, injections and withdrawals	The circular flow of income between households and firms, why national income, output and expenditure are equal, withdrawals and injections, equilibrium, the marginal propensity to consume, the multiplier formula and calculating it and its effect, imports and the multiplier, and negative multiplier effects.	16
Aggregate demand and its components	Recall questions on aggregate demand and its four components, why the curve slopes downwards, what counts as investment, and how confidence, interest rates and sterling move it.	16
Aggregate supply, input costs and productivity	Aggregate supply in the short and long run, input costs that shift short-run aggregate supply including oil prices, depreciation and national insurance, productivity against production, how productivity shifts long-run aggregate supply and allows non-inflationary wage rises, unit labour costs, and migration and other long-run factors.	15
Inflation, deflation and disinflation	Inflation, deflation and disinflation and telling them apart, why deflation is dangerous, benign against malign deflation, deflation and monetary policy, the deflationary spiral, hyperinflation, why central banks target positive inflation, self-fulfilling inflation expectations, and central bank credibility.	13
Price indices and the rate of inflation	Price indices and the Consumer Prices Index, the basket of goods and its weights, the Retail Prices Index, the Bank of England's target, calculating inflation from index values, the limitations of the index as a cost of living measure, core inflation, falling inflation with rising prices, base effects, and price collection.	14
Real and nominal values, constant and current prices	Nominal and real values, current and constant prices, deriving real GDP from nominal GDP and calculating it, real wages when pay rises faster or slower than inflation, comparing revenue growth with inflation, the real return on savings and the real interest rate, deflating an income, and long-run GDP comparisons.	13
Demand-pull and cost-push inflation	Demand-pull inflation, its causes and how it appears on an aggregate demand and supply diagram, full capacity, cost-push inflation, its causes and its diagram, stagflation, why cost-push is harder to control, the wage-price spiral, the monetarist view, using output data to tell the two apart, and combined pressures.	13
The impact of inflation on firms and individuals	How inflation creates uncertainty and affects investment, menu and shoe-leather costs, international competitiveness and floating exchange rates, how inflation can benefit a firm, confusing demand with inflation, fixed cash wages, fiscal drag, redistribution from savers to borrowers, anticipated against unanticipated inflation, and index-linking.	16
Employment, underemployment and the measurement of unemployment	Who counts as unemployed, the labour force and calculating the unemployment rate, economic inactivity, underemployment, the claimant count against the International Labour Organisation survey measure and how each is collected, their strengths and differences, international comparison, and the employment rate.	16
The causes of unemployment	Structural unemployment and structural change, occupational and geographical immobility of labour and how to reduce them, technological unemployment and automation, demand-deficient and cyclical unemployment, frictional, seasonal and real wage unemployment, hysteresis, and telling structural from cyclical unemployment.	16
The impact of unemployment on firms and individuals	How unemployment affects a firm's sales, recruitment and wage bargaining, why persistent unemployment harms firms, the cost to the public finances from two directions, opportunity cost to the economy, the effects of long-term unemployment and scarring, youth and regional unemployment, social costs, and rising costs as unemployment falls.	13

The Economic Cycle is 190 of the 2,933 questions in the guide.Get the guide, £8

How the guide is worked

Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.

Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
Step 2 · Open book
Go back to the top. Read each printed answer and write it out in full, including the ones you had right.
Step 3 · Closed book again
Same questions, same order, from memory. The gap between pass one and pass three is the session result.

Read the full method, the return schedule and the research behind it.