Unit 2

Boom = time of rapid growth and expansion in the economy.

• Sales of income elastic goods will increase significantly
• Sales of normal goods will rise
• Unemployment is low, consumers have more income to spend and feel more confident about the future
• Output of normal goods will rise and investment will be increase.
• Many new business start-ups and existing ones expand.

-  Sales of inferior goods will fall as consumers substitute normal goods in their place

-  Output of inferior goods will fall

-  Prices may rise as demand exceeds supply

-  Costs may rise as some resources become scarce; this may also increase prices.

-  Inflation can cause problems for a business.

Downturn = the boom slows and the rate of growth decreases.

• Inflation may ease
• Increase in prices and costs begin to slow and they may begin to fall.

-  Sales of income elastic goods wil fall

-  Sales of other goods will begin to slow

-  Unemploymeent begins to rise and consumers feel less confident, they may reduce spending

-  Investment slows and may fall.

Recession = there are at least two consecutive quaters of negative growth.

• Prices may fall as supply exceeds demand
• Cost may fall as some resources become more plentiful, this may also reduce prices
• Output of inferior goods will rise
• Sales of inferior goods will increase as consumers buy fewer normal goods and replace them with inferior goods.

-  Sales of income elastic goods will fall significantly

-  Sales of normal goods will fall

-  Unemployment is high, consumers have less income to spend and feel more uncertain about the future

-  Output of normal goods will fall and investment falls

-  Many businesses will fail and existing ones will cut back output.

Recovery = positive growth returns, slowly at first then picks up pace.

• Sales of income elastic goods begin to recover
• Sales of other goods begin to rise
• Consumers begin to feel that the worst is over, unemployment begins to fall and they spend more
• Investment begins to increase as confidence returns
• Output begins to rise
• There may be early signs of inflation as economic growth returns.

Boom

% Growth GDP = Rapid

Inflation = High

Unemployment = Low

Output = High

Incomes = Rising

Baste Rate = High

Downturn

% Growth GDP = Slowing

Inflation = Slowing

Unemployment = Increasing

Output = Static

Incomes = Static

Base Rate = Falling

Recession

% Growth GDP = Negative

Inflation = Low

Unemployment = High 

Output = Falling 

Incomes = Falling

Base Rate = Low

Recovery

% Growth GDP = Increasing 

Inflation = Rising

Unemployment = Falling

Output = Increasing 

Incomes = Static 

Base Rate = Increasing