THE BUSINESS

CYCLE
GROUP 2 - UNIT 14
What is the
Business Cycle?
The business cycle refers to economic fluctuations between
periods of expansion and contraction

Factors such as GDP, interest rates, total employment, and

consumer spending can help determine the current stage of
the economic cycle

The business cycle consists of four stages: expansion, peak,

contraction, and trough
KEY TERMS
 Key Terms
Business cycle model: a model showing the
increases and decreases in a nation’s real GDP over
time, this model typically demonstrates an
increase in real GDP over the long run, combined
with short-run fluctuations in output

Expansion: the phase of the business cycle during

which output is increasing

Recession: the phase of the business cycle during

which output is falling

Depression: a deep and prolonged recession

 Key Terms
Peak: the turning point in the business cycle
between an expansion and a contraction, during a
peak in the business cycle, output has stopped
increasing and begins to decrease

Trough: the turning point in the business cycle

between a recession and expansion, during a
trough in the business cycle, output that had been
falling during the recession stage of the business
cycle bottoms out and begins to increase again
 Key Terms
Recovery: when GDP begins to increase following a
contraction and a trough in the business cycle, an
economy is considered in recovery until real GDP returns
to its long-run potential level.

Potential output: the level of output an economy can

achieve when it is producing at full employment, when
an economy is producing at its potential output, it
experiences only its natural rate of unemployment, no
more and no less.

Growth trend: the straight line in the business cycle

model, which is usually upward-sloping and shows the
long-run pattern of change in real GDP over time
 Key Terms
Positive output gap: the difference between actual output
and potential output when an economy is producing
more than full employment output, when there is a
positive output gap, the rate of unemployment is less
than the natural rate of unemployment and an economy
is operating outside of its PPC (The production
possibilities curve)

Negative output gap: the difference between actual

output and potential output when an economy is
producing less than full employment output, when there
is a negative output gap, the rate of unemployment is
greater than the natural rate of unemployment and an
economy is operating inside its PPC.
LEAD- IN
How well is the global
economy doing at the
moment?
 2 3
1

The world economy in the At a high level, the central International organizations
first and second quarters of banks of many countries still forecast global economic
2023 faced many pursue tight monetary growth in 2023 slightly
difficulties and challenges, policies, strongly affecting higher than the forecast
the war between Russia economic growth, investment from the beginning of the
and Ukraine lasted for a and consumption. Many year but still 0.2 - 1
long time, global inflation major economies, including percentage point lower
cooled down but remained our country's important than the growth rate in
at a high level trading partners, went down 2022
or even went into recession
In the Southeast in Asia, the Asian Development Bank
(ADB) forecasts growth for a number of countries in
2023 as follows: Philippines 6.0% and Indonesia
4.8% unchanged from December 2023 forecast.
2022; Malaysia 4.7%, up 0.4 percentage points;
Thailand 3.3%, down 0.7 percentage points;
Singapore 2.0%, down 0.3 percentage points;
Vietnam 6.5%, up 0.2 percentage points.2 percentage
points
How well is the
economy doing
in Vietnam?
Currently, Vietnam's economy has achieved high growth, the epidemic is under
control, creating favorable conditions for socio-economic recovery and development.

Macro-economy remained stable, inflation was controlled, major balances were

ensured in the context of many difficulties and pressures. Production and business
activities recovered strongly. Foreign direct investment continues to be a bright spot,
reaching a new record while competition is increasingly fierce. The fight against
corruption and negativity has been promoted
When was the last significant change to
the economy, and what was the most
probable cause ?
 As of my knowledge cutoff in September 2021, the most
recent significant change to the global economy was the
COVID-19 pandemic, which emerged in late 2019 and
significantly impacted the world's economies in 2020 and
beyond. The pandemic led to widespread disruptions in
various sectors, including travel, tourism, manufacturing,
and supply chains.

The most probable cause of the economic impact was the

measures taken to contain the spread of the virus, such as
lockdowns, travel restrictions, and social distancing
measures. These measures resulted in reduced economic
activity, temporary closures of businesses, layoffs, and
decreased consumer spending. The pandemic also led to
financial market volatility and increased uncertainty,
further affecting economic conditions.
When do you
expect the
economic
Situation to
change, and
why?
I expect the economic situation to change when the economic cycle falls into phase 2 (Peak)
because economic situation, which cannot increase forever, will turn down when touch the
highest point
What are the main causes of the
alternate periods of growth and
contraction of the business cycle?
Every nation's economy fluctuates These changes are caused by levels of In the short-run, these changes
between periods of expansion and employment, productivity, and the lead to periods of expansion and
contraction total demand for and supply of the recession
nation's goods and services
READING 1
What causes the business cycle?
The business cycle is primarily caused by fluctuations in aggregate
demand and aggregate supply. Contributing factors include political
and economic policies, investment and consumer spending, external
shocks, technological advancements, and demographic factors.
 MATCH UP THE WORDS AND DEFINITIONS BELOW:

balance of payments gross domestic product (GDP) consumption

demand supply downturn
upturn save expectations

1. a decline in economic activity

2. an increase in economic activity
3. beliefs about what will happen in the future
4. purchasing and using goods and services
5. the difference between the funds a country receives and those it pays for all international
transactions
6. the total market value of all the goods and services produced in a country during a given
period
7. the willingness and ability of consumers to purchase goods and services
8. the willingness and ability of businesses to offer goods or services of sale
9. to put money aside to spend in the future

- READING 1 -
 1. a decline in economic activity downturn
2. an increase in economic activity upturn
3. beliefs about what will happen in the future expectations
4. purchasing and using goods and services consumption
5. the difference between the funds a country receives and those it pays for all international
transactions balance of payments
6. the total market value of all the goods and services produced in a country during a given
period
7. the willingness and ability of consumers to purchase goods and services
8. the willingness and ability of businesses to offer goods or services of sale
9. to put money aside to spend in the future

- READING 1 -
 1. a decline in economic activity downturn
2. an increase in economic activity upturn
3. beliefs about what will happen in the future expectations
4. purchasing and using goods and services consumption
5. the difference between the funds a country receives and those it pays for all international
transactions balance of payments
6. the total market value of all the goods and services produced in a country during a given
period gross domestic product (GDP)
7. the willingness and ability of consumers to purchase goods and services demand
8. the willingness and ability of businesses to offer goods or services of sale supply
9. to put money aside to spend in the future save

- READING 1 -
 The business cycle or trade cycle is a permanent feature of market economies: (1)____ alternately
Read the text and fill in the gaps grows and contracts. During an (2)____ parts of the economy expand to the point where they are
working at full capacity, so that production, employment, business investments, profits, prices, and
with words from the exercise above: interest rates all tend to rise. A long period of expansion is called a boom. But at some point, there will
inevitably be a (3)____. The economy will hit a peak and start to contract again, the demand for goods
and services will decline and the economy will begin to work at below its potential. Investment, output,
employment, profits, commodity and share prices, and interest rates will generally fall. A downturn that
lasts more than six months is called a recession; one that lasts for a year or two is generally called a
depression or a slump. Eventually, the economy will bottom out, and there will be a recovery or an
upturn.
The most probable cause of the business cycle is people's spending or (4)____ decisions, which in
balance of payments demand turn are based on (5)____. A country's output, investment, unemployment, (6)____, and so on, all
depend on millions of decisions by consumers and businesses on whether to spend, borrow or (7)____.
gross domestic product (GDP) When economic times are good or when people feel confident about the future, they spend and
consumption supply run up debt. At a certain point, spending has to slow down and debts have to be paid. If interest rates
unexpectedly rise, a lot of people find themselves paying more than they anticipated on their mortgage
downturn upturn or rent, and so have to consume less. Similarly, if people are worried about the possibility of losing their
save expectations jobs in the near future they tend to start saving money and consuming less, which leads to a fall in
(8)____ and consequently a fall in production and employment. Investment is closely linked to
consumption and only takes place when demand is growing. As soon as demand stops growing,
investment in new factories, machines, etc. falls, which contributes to the downturn. But if (9)____
exceeds demand, prices should fall, and encourage people to start buying again. Eventually the economy
will reach a trough or bottom out, and there will be a recovery or an upturn.
This is the internal (or endogenous) theory of the business cycle; there are also external (or
exogenous) theories, which look for causes outside economic activity, such as scientific advances, natural
disasters, elections or political shocks, demographic changes, and so on. The economist Joseph
Schumpeter believed that the business cycle is caused by major technological inventions (e.g. the steam
engine, railways, automobiles, electricity, microchips), which lead to periods of ‘creative destruction' during
- READING 1 -
which radical innovations destroy established companies or industries.
 The business cycle or trade cycle is a permanent feature of market economies: (1) GDP alternately
Read the text and fill in the gaps grows and contracts. During an (2) upturn parts of the economy expand to the point where they are
working at full capacity, so that production, employment, business investments, profits, prices, and interest
with words from the exercise above: rates all tend to rise. A long period of expansion is called a boom. But at some point, there will inevitably be
a (3) downturn. The economy will hit a peak and start to contract again, the demand for goods and services
will decline and the economy will begin to work at below its potential. Investment, output, employment,
profits, commodity and share prices, and interest rates will generally fall. A downturn that lasts more than
six months is called a recession; one that lasts for a year or two is generally called a depression or a slump.
Eventually, the economy will bottom out, and there will be a recovery or an upturn.
The most probable cause of the business cycle is people's spending or (4) ____ decisions, which in
turn are based on (5)____. A country's output, investment, unemployment, (6)____, and so on, all
balance of payments demand depend on millions of decisions by consumers and businesses on whether to spend, borrow or (7)____.
When economic times are good or when people feel confident about the future, they spend and run
gross domestic product (GDP) up debt. At a certain point, spending has to slow down and debts have to be paid. If interest rates
consumption supply unexpectedly rise, a lot of people find themselves paying more than they anticipated on their mortgage or
rent, and so have to consume less. Similarly, if people are worried about the possibility of losing their jobs in
downturn upturn the near future they tend to start saving money and consuming less, which leads to a fall in
save expectations (8)____ and consequently a fall in production and employment. Investment is closely linked to
consumption and only takes place when demand is growing. As soon as demand stops growing,
investment in new factories, machines, etc. falls, which contributes to the downturn. But if (9)____
exceeds demand, prices should fall, and encourage people to start buying again. Eventually the economy
will reach a trough or bottom out, and there will be a recovery or an upturn.
This is the internal (or endogenous) theory of the business cycle; there are also external (or exogenous)
theories, which look for causes outside economic activity, such as scientific advances, natural disasters,
elections or political shocks, demographic changes, and so on. The economist Joseph Schumpeter believed
that the business cycle is caused by major technological inventions (e.g. the steam engine, railways,
automobiles, electricity, microchips), which lead to periods of ‘creative destruction' during which radical
innovations destroy established companies or industries.
- READING 1 -
 The business cycle or trade cycle is a permanent feature of market economies: (1) GDP alternately
Read the text and fill in the gaps grows and contracts. During an (2) upturn parts of the economy expand to the point where they are
working at full capacity, so that production, employment, business investments, profits, prices, and interest
with words from the exercise above: rates all tend to rise. A long period of expansion is called a boom. But at some point, there will inevitably be
a (3) downturn. The economy will hit a peak and start to contract again, the demand for goods and services
will decline and the economy will begin to work at below its potential. Investment, output, employment,
profits, commodity and share prices, and interest rates will generally fall. A downturn that lasts more than
six months is called a recession; one that lasts for a year or two is generally called a depression or a slump.
Eventually, the economy will bottom out, and there will be a recovery or an upturn.
The most probable cause of the business cycle is people's spending or (4) consumption decisions,
which in turn are based on (5) expectations. A country's output, investment, unemployment, (6) balance
balance of payments demand of payments, and so on, all depend on millions of decisions by consumers and businesses on whether to
spend, borrow or (7)____.
gross domestic product (GDP) When economic times are good or when people feel confident about the future, they spend and run
consumption supply up debt. At a certain point, spending has to slow down and debts have to be paid. If interest rates
unexpectedly rise, a lot of people find themselves paying more than they anticipated on their mortgage or
downturn upturn rent, and so have to consume less. Similarly, if people are worried about the possibility of losing their jobs in
save expectations the near future they tend to start saving money and consuming less, which leads to a fall in
(8)____ and consequently a fall in production and employment. Investment is closely linked to
consumption and only takes place when demand is growing. As soon as demand stops growing,
investment in new factories, machines, etc. falls, which contributes to the downturn. But if (9)____
exceeds demand, prices should fall, and encourage people to start buying again. Eventually the economy
will reach a trough or bottom out, and there will be a recovery or an upturn.
This is the internal (or endogenous) theory of the business cycle; there are also external (or exogenous)
theories, which look for causes outside economic activity, such as scientific advances, natural disasters,
elections or political shocks, demographic changes, and so on. The economist Joseph Schumpeter believed
that the business cycle is caused by major technological inventions (e.g. the steam engine, railways,
automobiles, electricity, microchips), which lead to periods of ‘creative destruction' during which radical
- READING 1 -
innovations destroy established companies or industries.
 The business cycle or trade cycle is a permanent feature of market economies: (1) GDP alternately
Read the text and fill in the gaps grows and contracts. During an (2) upturn parts of the economy expand to the point where they are
working at full capacity, so that production, employment, business investments, profits, prices, and interest
with words from the exercise above: rates all tend to rise. A long period of expansion is called a boom. But at some point, there will inevitably be
a (3) downturn. The economy will hit a peak and start to contract again, the demand for goods and services
will decline and the economy will begin to work at below its potential. Investment, output, employment,
profits, commodity and share prices, and interest rates will generally fall. A downturn that lasts more than
six months is called a recession; one that lasts for a year or two is generally called a depression or a slump.
Eventually, the economy will bottom out, and there will be a recovery or an upturn.
The most probable cause of the business cycle is people's spending or (4) consumption decisions,
which in turn are based on (5) expectations. A country's output, investment, unemployment, (6) balance
balance of payments demand of payments, and so on, all depend on millions of decisions by consumers and businesses on whether to
spend, borrow or (7) save.
gross domestic product (GDP) When economic times are good or when people feel confident about the future, they spend and run
consumption supply up debt. At a certain point, spending has to slow down and debts have to be paid. If interest rates
unexpectedly rise, a lot of people find themselves paying more than they anticipated on their mortgage or
downturn upturn rent, and so have to consume less. Similarly, if people are worried about the possibility of losing their jobs in
save expectations the near future they tend to start saving money and consuming less, which leads to a fall in
(8) demand and consequently a fall in production and employment. Investment is closely linked to
consumption and only takes place when demand is growing. As soon as demand stops growing,
investment in new factories, machines, etc. falls, which contributes to the downturn. But if (9) supply
exceeds demand, prices should fall, and encourage people to start buying again. Eventually the economy
will reach a trough or bottom out, and there will be a recovery or an upturn.
This is the internal (or endogenous) theory of the business cycle; there are also external (or exogenous)
theories, which look for causes outside economic activity, such as scientific advances, natural disasters,
elections or political shocks, demographic changes, and so on. The economist Joseph Schumpeter believed
that the business cycle is caused by major technological inventions (e.g. the steam engine, railways,
automobiles, electricity, microchips), which lead to periods of ‘creative destruction' during which radical
- READING 1 -
innovations destroy established companies or industries.
 During the boom phase of the cycle, businesses expand and
increase production activities. As a result, the quantity of goods
produced increases. Additionally, the income of workers also
increases in proportion to the productive capacity of businesses,
leading to higher levels of spending. These factors contribute to
business growth and the ability to expand scale.
However, at a certain point, the quantity of products
produced exceeds the market demand. At this stage, there is an
oversupply relative to demand, and businesses have to cut back
on production and labor to reduce production costs. Income
decreases, and market spending also decreases proportionally.
This is the factor that leads to the recession of the economy and
the start of a new cycle.

- READING 1 -
 Complete the following sentences:

1. A downturn begins when...

2. People spend, and borrow money, when...
3. People tend to spend less when...
4. When interest rates rise...
5. Companies only invest while...
6. Creative destruction means that...

- READING 1 -
 1. A downturn begins when...
=> A downturn begins when economic indicators decline, leading to
reduced spending, investments, and overall economic contraction.

- READING 1 -
 2. People spend, and borrow money, when...
=> People spend and borrow money when they have the means to do
so and perceive it as a beneficial investment or a necessary expense for
their current or future needs.

- READING 1 -
 3. People tend to spend less when...
=> People tend to spend less when they face financial uncertainty or
have a decrease in income.

- READING 1 -
 4. When interest rates rise...
=> When interest rates rise, borrowing becomes more expensive and
individuals and businesses may reduce their spending and investment.

- READING 1 -
 5. Companies only invest while...
=> Companies only invest while they believe that the cost of borrowing
is reasonable and the anticipated returns from investment projects are
higher.

- READING 1 -
 6. Creative destruction means that...
=> Creative destruction means that new innovations and technologies
constantly replace outdated industries and practices, driving economic
growth and progress.

- READING 1 -
 boost expand depression output

decrease expenditure excess recovery

Match the words into pairs with similar meanings

stimulate grow slump production

reduce spending surplus upturn

 boost - stimulate
decrease - reduce
depression - slump
excess - surplus
 boost - stimulate expand - grow
decrease - reduce expenditure - spending
depression - slump output - production
excess - surplus recovery - upturn
 boom demand peak

contract endogenous save

Match the words into pairs with opposite meanings

depression supply exogenous

expand trough spend

boom - depression
demand - supply
peak - trough
contract - expand
endogenous - exogenous
save - spend
Reading 2
Keynesianism & monetarism
 Keynesianism
Activist fiscal and monetary policy are the primary
tools recommended by Keynesian economists to
manage the economy and fight unemployment.

Keynesians believe that fiscal measures, such as

increased government spending and reduced
taxation, can boost output, investment, consumption,
and employment.

John Maynard Keynes

 Monetarism
A monetarist -holds the strong belief that money supply including
physical currency, deposits, and credit is the primary factor affecting
demand in an economy

-->Consequently, the economy's performance its growth or

contraction can be regulated by changes in the money supply.

Monetarists argue for a hands-off approach by the government,

emphasizing the importance of maintaining a constant and non-
inflationary growth in the money supply.

Milton Friedman
 Keynesianism & monetarism

Both arguments have their supporters and critics. The effectiveness of government intervention versus
market autonomy continues to be a subject of debate among economists
 Match
A. Countercyclical policies don't work until too late
Paragraph Heading B. Keynesianism returns
C. The Keynesian argument
D. The lesson of the 1930s
1 E. The monetarist argument

5
 Match
A. Countercyclical policies don't work until too late
Paragraph Heading
B. Keynesianism returns
C. The Keynesian argument
1 C D. The lesson of the 1930s
E. The monetarist argument

2 D

5
 Match
A. Countercyclical policies don't work until too late
Paragraph Heading B. Keynesianism returns
C. The Keynesian argument
D. The lesson of the 1930s
1 C E. The monetarist argument

2 D

3 E

4 A

5 B
Comprehension
1 Keynes argued that left to itself, the free market A cause interest rates to fall and investment to increase again.
system
B decrease their spending or increase taxation.
2 In classical theory, if consumption and
investment fall, excess savings should C does not guarantee full employment.

3 Keynesians argue that during an inflationary boom D in 2008, when major financial institutions began to go
governments should bankrupt.

E increase their spending or the money supply.

4 Keynesians argue that during an
economicdownturn governments should F increasing the money supply merely leads to inflation.

5 Monetarists argue that in the long run, G only begin to take effect too late, when an upturn is already
beginning
6 Monetarists also believe that Keynesianfiscal
measures

7 There was a revival in Keynesian policies and

government intervention
Comprehension
1 Keynes argued that left to itself, the free market A cause interest rates to fall and investment to increase again.
system
B decrease their spending or increase taxation.
2 In classical theory, if consumption and
investment fall, excess savings should C does not guarantee full employment.

3 Keynesians argue that during an inflationary boom D in 2008, when major financial institutions began to go
governments should bankrupt.

E increase their spending or the money supply.

4 Keynesians argue that during an
economicdownturn governments should F increasing the money supply merely leads to inflation.

5 Monetarists argue that in the long run, G only begin to take effect too late, when an upturn is already
beginning
6 Monetarists also believe that Keynesianfiscal
measures

7 There was a revival in Keynesian policies and

government intervention
Comprehension
1 Keynes argued that left to itself, the free market A cause interest rates to fall and investment to increase again.
system
B decrease their spending or increase taxation.
2 In classical theory, if consumption and
investment fall, excess savings should C does not guarantee full employment.

3 Keynesians argue that during an inflationary boom D in 2008, when major financial institutions began to go
governments should bankrupt.

E increase their spending or the money supply.

4 Keynesians argue that during an
economicdownturn governments should F increasing the money supply merely leads to inflation.

5 Monetarists argue that in the long run, G only begin to take effect too late, when an upturn is already
beginning
6 Monetarists also believe that Keynesianfiscal
measures

7 There was a revival in Keynesian policies and

government intervention
Which is more important,
fighting inflation or
unemployment?
The importance of fighting inflation versus unemployment is debated. Policymakers
aim to balance both goals as high inflation erodes purchasing power and creates
instability, while high unemployment indicates underutilization of resources and
reduces output. The optimal balance depends on economic circumstances. During
recession, reducing unemployment may take priority, even if it risks short-term
inflation. During high inflation, controlling it may be prioritized, potentially leading to
temporary unemployment. The appropriate policy mix depends on specific economic
conditions, inflation and unemployment rates, and policymakers' goals. Striking a
balance requires careful analysis and consideration of trade-offs.
 Case study 1

o
T
a
t
peak
c
rec
ess a
ion
During the expansion phase, interest rates are
ion

often on the low side.

s
The demand for consumer goods is growing,
ns

and businesses begin ramping up production

trough
to meet consumer demand.
pa

a
-> Businesses hire more workers or invest
ex

capital to expand their physical infrastructure

and operations.
-> Corporate profits begin to rise along with
stock prices. Gross domestic product (GDP)
also begins rising as the economy gets its
“boom” cycle underway.
Expansion
During the expansion phase, interest rates are
often on the low side.
The demand for consumer goods is growing,
and businesses begin ramping up production
to meet consumer demand.
-> Businesses hire more workers or invest
capital to expand their physical infrastructure
and operations. Peak

-> Corporate profits begin to rise along with

At this stage, the economy reaches a
maximum rate of growth.
As consumer demand rises, there’s a
point at which businesses may no longer
be able to ramp up production and
supply -> expand production capabilities,
which entails more spending or
investment -> begin experiencing a rise
in production costs, prompting some to
transfer these costs over to the

stock prices. Gross domestic product (GDP)

consumer via higher prices.
Overall, inflationary pressures start to
build up, or “bubble,” and the economy
begins to overheat.

also begins rising as the economy gets its

“boom” cycle underway.
Peak
At this stage, the economy reaches a
maximum rate of growth.
As consumer demand rises, there’s a
point at which businesses may no longer
be able to ramp up production and
supply -> expand production capabilities,
which entails more spending or
investment -> begin experiencing a rise Recession
It begins after the economy peaks.

in production costs, prompting some to

In this stage, the economy does not experience
growth; instead, it shrinks.
When the GDP rate turns negative, the economy
enters a recession -> Businesses lay off employees,
the unemployment rate rises above normal levels,
and prices begin to decline.

transfer these costs over to the

A recession is generally portrayed on a graph as the
part of the curve that is consistently decreasing.
In a depression, many businesses close up shop for
good.

consumer via higher prices.

Overall, inflationary pressures start to
build up, or “bubble,” and the economy
begins to overheat.
 Recession
It begins after the economy peaks.
In this stage, the economy does not experience
Trough
growth; instead, it shrinks.
When the GDP rate turns negative, the economy
enters a recession -> Businesses lay off employees,
the unemployment rate rises above normal levels,
and prices begin to decline.
A recession is generally portrayed on a graph as the
part of the curve that is consistently decreasing.
In a depression, many businesses close up shop for
The declining GDP begins to decrease its rate
of negative change, eventually turning
positive again.
The economy begins a transition from the
contraction phase to the expansion phase.
A trough is displayed on a graph as the
lowest point of the curve.
The business cycle begins again when GDP

good.
begins to increase, and the curve moves
upward consistently.
Trough
The declining GDP begins to decrease its rate
of negative change, eventually turning
positive again.
The economy begins a transition from the
contraction phase to the expansion phase.
A trough is displayed on a graph as the
lowest point of the curve.
The business cycle begins again when GDP
begins to increase, and the curve moves
upward consistently.
Which of the following most likely describes what Country Z
experience as it moves from point A to point B?
A. An increase in unemployment and an inwaed shift of its PPC
B. Rising output and a fall in cyclical unemploymet
C. Rising unemployment and a movement from a point on its PPC to a point inside
its PPC
D. A negative output gap and an increase in the natural rate of unemployment
E. Falling unemployment and a movement from a point inside its PPC to a point
closer to its PPC

peak
rec
ess
ion

ion
ns
trough

pa
ex
Which of the following most likely describes what Country Z
experience as it moves from point A to point B?
A. An increase in unemployment and an inwaed shift of its PPC
B. Rising output and a fall in cyclical unemploymet
C. Rising unemployment and a movement from a point on its PPC to a point
inside its PPC
D. A negative output gap and an increase in the natural rate of unemployment
E. Falling unemployment and a movement from a point inside its PPC to a point
closer to its PPC

peak
rec
ess
ion

ion
ns
trough

pa
ex
 Case Study 2
Abe’s Best Cycle (ABC) produces motorbikes in country X. The company was set up
50 years ago. The motorbikes are designed to meet the needs of low-income
consumers in country X. It has been a very successful company and has increased its
output each year. The share price of ABC has been rising and dividends are paid each
year.
ABC employs 500 skilled workers in its factory and uses capital-intensive production. 90% of all the motorbikes are
sold in country X. There are several other motorbike manufacturers in country X but more than half of the motorbikes
sold in country X are imported. The competitors of ABC import all of their components whilst ABC imports only half
of the components it needs. It buys the rest from local suppliers.
The economy of country X has been growing rapidly after being in a recession. However, inflation is starting to
increase and become a problem. The government is considering different ways to reduce inflation. The currency used
in country X is the dollar ($), and the average exchange rate of the $ against other currencies has been appreciating.

Identify the four stages of the business cycle.

Outline two effects on ABC of rising inflation.
Outline two effects on ABC if the government of country X increases import tariffs on all imported goods.
1. Identify the four stages
of the business cycle.

-CASE STUDY 2-
 The four stages of the business cycle
Most will experience a period of growth followed by stagnation before they hit another growth period.
These transitions are known as the business cycle, which consists of four distinct phases:
Economic cycles are the recurrent boom-
and-bust phases that market and
economies typically exhibit. Think of it
like a wave:
Expanding from a trough,
Peaking at the crest,
Descending (“contracting”) from the
high point, and
Hitting bottom and recovering,
where the wave begins an
2. two effects on ABC of
rising inflation

-CASE STUDY 2-
 some effects of
rising inflation ??

-CASE STUDY 2-
 2. two effects on ABC
of rising inflation
1. Inflation Erodes Purchasing Power

2. Inflation Disproportionately Impacts

Lower - Income Consumers

-CASE STUDY 2-
1. Inflation Erodes Purchasing Power
This is inflation's primary and most pervasive effect. An overall rise in prices over time reduces
the purchasing power of consumers since a fixed amount of money will afford progressively
less consumption. Consumers lose purchasing power regardless of what the inflation rate is
=> Therefore, this not only affects the common economy but also affects
the number of people buying motorbikes of ABC

2. Inflation Disproportionately Impacts Lower-Income Consumers

Lower-income consumers tend to spend a higher proportion of their income on necessities
than those with higher incomes. This means they have less of a cushion against the loss of
purchasing power inherent in inflation.
=> ABC's motorbikes are produced to meet the needs of low-income consumers of country X
so inflation has also affected ABC.

-CASE STUDY 2-
3. two effects
on ABC
if the government of country X
increases import tariffs on all
imported goods

-CASE STUDY 2-
3. Outline two effects on ABC if the government of country X
increases import tariffs on all imported goods.
According to data, more than half of the motorbikes are sold in country X in the form of
imported goods. Therefore, when government X increases import tariffs for all imported
goods, the value of imported goods will increase
=> The need to buy imported motorbikes will decrease, promote the demand for domestic
goods
=> Beneficial for domestic motorcycle manufacturing companies like ABC

The price of ABC Motorbike will increase less because half of the components they have
are imported goods. But compared to the value of the rival market (importing all
components), the increase is negligible.

-CASE STUDY 2-
UNIT REVIEW
4 PHASES OF AN ECONOMIC CYCLE
Trang Tài nguyên

DISCUSSION
QUESTION
Why does unemployment
rise during the recession
phase of the
business cycle?
- The aggregate supply is typically more than the
aggregate demand
- So there is less of a need for employees
- Less goods and services are being produced
- Business began laying off workers in the need to
save money because of low demand for their
products
What is the difference between
a recession and a depression?
If a country is producing beyond
its production possibilities curve,
what phase of the business cycle
is it most likely experiencing?
 It is likely experiencing an expansion, where
unemployment is significantly decreasing and
inflation is increasing. This is typically an
unsustainable period that leads the peak where
the economy starts slowly receding.
During a downturn, to what extent
should the government intervene in the
economy by creating demand or jobs?
-cut taxes
-lower interest rates
-pumb money into the economy
VOCABULARY
 EXERCISE 1: Complete the text about dealing with the business cycle with the
phrases in the box.

What can central bankers and government (1) ___________do? Can they prevent a contraction
from turning into a recession? What tools are available to them? The following three are the most important:
Interest rate adjustments
The strongest and fastest tool in a weakening economy is the Central Banks ability to cut interest rates. For
companies and individuals with existing bank loans, repayments are reduced; for others, (2)________
become less expensive. Most central Banks drop rates by quarter-points or, at crucial times, half-points.
Lowering rates still takes two or three quarters to benefit an economy, and it does also have unfortunate
(3)_________.
The negative consequences are that it weakens a nation's currency and that any growth it causes may be
inflationary.
EXERCISE 1: Complete the text about dealing with the business cycle with the
phrases in the box.

What can central bankers and government (1) policy- makers do? Can they prevent a contraction
from turning into a recession? What tools are available to them? The following three are the most
important:
Interest rate adjustments
The strongest and fastest tool in a weakening economy is the Central Banks ability to cut interest
rates. For companies and individuals with existing bank loans, repayments are reduced; for others,
(2)government debt
become less expensive. Most central Banks drop rates by quarter-points or, at crucial times, half-
points. Lowering rates still takes two or three quarters to benefit an economy, and it does also have
unfortunate (3) side- effects.
The negative consequences are that it weakens a nation's currency and that any growth it causes
may be inflationary.
EXERCISE 1: Complete the text about dealing with the business cycle with the
phrases in the box.

Economic stimulus
A national government can choose to spend money- usually money it must borrow- on all sorts
of projects in order to stimulate the economy. This puts money back into people's pockets so
that they can buy goods and services to boost the economy. (4)__________ are another way of
achieving the same effect. The problem arises when these measures lead to high levels of
(5)__________. Eventually, that debt will have to repaid.
Regulatory reforms
A country can implement reforms to the law in order to stimulate growth. These include
measures to enhance competition, to liberalize the (6)____________, to make it easier to start a
new business, etc..
EXERCISE 1: Complete the text about dealing with the business cycle with the
phrases in the box.

Economic stimulus
A national government can choose to spend money- usually money it must borrow- on all sorts
of projects in order to stimulate the economy. This puts money back into people's pockets so
that they can buy goods and services to boost the economy. (4) new borrowing are another
way of achieving the same effect. The problem arises when these measures lead to high levels
of (5) Tax cuts. Eventually, that debt will have to repaid.
Regulatory reforms
A country can implement reforms to the law in order to stimulate growth. These include
measures to enhance competition, to liberalize the (6) Labour market, to make it easier to start
a new business, etc..
EXERCISE 2: Underline the correct words in italics. Check any unknown words in
a dictionary.
1. The consumer discretionary sector of the company starts to recover when interest rates are
high / low, and just before the general economy picks up / turns down.
2. Investors favour the consumer staples sector at the beginning / end of the growth cycle, just
as the markets are picking up / turning down.
3. If a government or company wants to borrow money, it can issue a bond / an obligation.
Investors recieve a fixed / variable rate of interest over a fixed period of time and then get
their original investment back at the end.
4. A rise in interest rates makes borrowing cheaper / more expensive. This cools / stimulates
the economy.
5. Central Banks lower interest rates if they think the economy is likely to grow / contract and
will act aggressively if they think there is a danger of a boom / recession.
6. Stock markets tend to anticipate / move in line with / react to changes in the real economy.
7. Interest rates tend to bottom out before / after both the stock markets and the real economy
8. A rising market is called a bear / bull market. people who think that a particular market is
going to rise in the future are described as being bullish / bull-like on that market.
EXERCISE 2: Underline the correct words in italics. Check any unknown words in
a dictionary.
1. The consumer discretionary sector of the company starts to recover when interest rates are
high / low, and just before the general economy picks up / turns down.
2. Investors favour the consumer staples sector at the beginning / end of the growth cycle, just
as the markets are picking up / turning down.
3. If a government or company wants to borrow money, it can issue a bond / an obligation.
Investors recieve a fixed / variable rate of interest over a fixed period of time and then get
their original investment back at the end.
4. A rise in interest rates makes borrowing cheaper / more expensive. This cools / stimulates
the economy.
5. Central Banks lower interest rates if they think the economy is likely to grow / contract and
will act aggressively if they think there is a danger of a boom / recession.
6. Stock markets tend to anticipate / move in line with / react to changes in the real economy.
7. Interest rates tend to bottom out before / after both the stock markets and the real economy
8. A rising market is called a bear / bull market. people who think that a particular market is
going to rise in the future are described as being bullish / bull-like on that market.
MINI GAME

We wil give some suggested

pictures, and you need to
guess the correct words in
the lesson base on the
picture given.
ANSWER: BASIC MATERIALS
ANSWER: CAPITAL GOODS
ANSWER: COMMERCIAL SERVICES
ANSWER: CONSUMER STAPLES
ANSWER: ENERGY
ANSWER: FINANCIALS
ANSWER: TRANSPORTATION
THANK YOU
For Your Attention