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Unit 3 AOS 2 (The business cycle (Looks at the fluctuations in growth of…
Unit 3 AOS 2
The business cycle
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Economies usually experience a period of expansion (a boom) then a peak (growth slows or stops), then a contraction (growth declines), then a trough (growth stops declining) then an expansion again
Expansion - inflation is low to encourage demand, assets are cheap, unemployment is high but decreasing due to spare capacity reducing, savings is high so funds are available for investment, consumer/business confidence is rising, AD/AS is rising
Peak - investors lose confidence as they notice they are receiving little income in return for their investments, asset prices and demand begin to fall, consumer and business confidence begin to fall
Contraction - consumer and business confidence are low, asset prices drop significantly due to low demand, people save rather than spend, unemployment increases, AD and AS decrease
Trough - asset prices are low meaning people being to invest as they gain higher returns, high levels of savings, unemployment is high so labour is cheap and readily available, inflation is low, AD and AS and confidence are low
Full employment
To reach a level of employment consistent with the achievement of non-inflationary sustainable economic growth and an absence of cyclical unemployment, at around 4.5-5%
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Causes of unemployment
Cyclical unemployment - depends on the type of unemployment, influenced by the business cycle and aggregate demand, occurs during a downturn in the economy and can be affected by the AD factors
Multiplier effect - increase or decrease in something can have an effect that is bigger than the initial impact e.g. unemployment rising can cause losses of confidence which ultimately decreases production and thus further decreases unemployment
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The circular flow
- Resources flow from households to businesses
- Businesses pay for these resources in wages/rent/dividends
- G/s are provided by businesses to households
- Payment is made for these g/s by households to businesses
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Aggregate demand
the total value of all spending on final goods and services produced by a nation over a period of time
AD = Private consumption expenditure + private investment expenditure + government current spending + government capital spending + (exports - imports)
AD factors
Disposable income - increases mean increases in AD as there is more cash available for households to use to consumer
Interest rates - increase in interest rates means decrease in AD as it decreases discretionary income for households and decreases incentives for investment
Consumer confidence - higher confidence = more willing to take on debt to consume and increases the marginal propensity to consumer (the change in consumption from $1 of additional income) increase AD
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Economic growth overseas - increases in overseas growth especially of our trading partners will increase AD as it will increase demand for our exports
Changes in the general level of prices - causes a movement along the demand curve NOT a shift in the curve
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Living standards
Material - measured by a household's access to goods and services
Non-material - elements of human wellbeing which are not directly linked to goods and services
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Aggregate supply
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AS factors
Changes in the general level of prices - causes a movement along the supply curve NOT a shift in the curve
Quantity of factors of production - increases AS are suppliers have more inputs available to produce outputs, increases productive capacity
Quality of factors of production - how quality is affected or can be improved, increases AS as efficiency increases and thus increasing outputs
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Technological change - increases AS as efficiency is increased and productivity is increased and thus firms can produce more output per unit of inputs
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Exchange rates - increase in AUD means imported capital and intermediate goods become cheaper increases AS
Climatic conditions - favourable conditions increases AS as resources are less scarce and quantity and quality is improved