Gr 10 Chapter 3 = Business cycles - memo

BUSINESS CYCLES

SOLUTIONS FOR
INFORMAL ACTIVITIES FOR TERM 1

GRADE 10

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Gr 10 Chapter 3 = Business cycles - memo

BUSINESS CYCLES

Basic concepts
CONCEPT DEFINITION
Business cycle Business Cycles can be described as consecutive periods of
increasing and decreasing of economic activity of a country.
Upswing/expansion phase Increase in economic activities and an upward movement along
the business cycle.
Downswing/Contraction Decrease in economic activities and a downward movement
along the business cycle.

Recession Slowdown in the economic activities over time

Depression Severe slowdown of economic activities, the economic growth
gets close to zero
Recovery phase An indication that an increase in economic activities has started
Prosperity phase The economy has recovered and is accelerating in terms growth
Peak Economic activities are at its highest point. It signals the end of
the expansion phase. From this point the contraction phase starts
Trough Economic activities are at its lowest point. It signals the end of the
contraction phase. It is a turning point indicating the start of the
expansion phase
Boom Latter part of the prosperity phase. Economic activities are at the
extreme
Trend line A line indicating the general direction of economic activity over the
long term
Amplitude The distance between the trend line and the peak and trough

Economic indicator It is an indicator that shows or suggests how an economy is likely

to behave
Lagging indicator These activities confirm that economic activities have taken place.
In other words, it confirms the state of the economy. Lagging
indicators change after the cycle turned.
Leading indicator These indicators reach a peak before economic activities peaks
or reach a trough before economic activities reaches a trough.
Coincident indicator These activities take place simultaneously with the changes in the
economy. Coincident indicators change with the cycle.
Endogenous factors Forces inside the market causing fluctuating economic activities
Exogenous factors Forces outside that markets causing fluctuating economic
activities
Keynesian view Stipulate that endogenous reasons cause economic fluctuations.
Markets are inherently unstable. Government intervention is
necessary.
Interventionist view/ Stipulate that exogenous reasons cause economic fluctuations.
Monetarist view Inappropriate government policies, weather and structural
changes in the economy cause business cycles

Definition
Business Cycles can be described as consecutive periods of increasing and decreasing of economic
activity of a country.
- These activities are described by indicators
- An indicator points or signals direction.
- Example: if retails sales increase, a growing economy is expected (expansionary
phase)
- If retails sales decrease, a declining economy is expected (contractionary phase)
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Gr 10 Chapter 3 = Business cycles - memo

1. Short exercise to see if they understand the different points on the circular flow

1 Identify the following from the graph

a. Peak
b. Trough
c. Upswing
d. Downswing
e. Recession
f. Depression
g. Recovery phase
f. Expansionary phase (8)

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2. Study the graph below and answer the questions that follow

Label each area / point on the graph next to the question number.

a) 2.1 B-C
b) 2.2 C-D
c) 2.3 D-E
d) 2.4 E-F
e) 2.5 Point B/ F
f) 2.6 Point D/H (6)

CYCLICAL PATTERNS (PHASES OF BUSINESS CYCLES)

(1) UPSWING/EXPANSION PHASE

Increase in economic activities and an upward movement along the business cycle.
• Recovery phase
- An indication that an increase in economic activities has started.
• Prosperity phase
- The economy has recovered and is accelerating in terms growth.
• Peak
- Economic activities are at its highest point. It signals the end of the expansion
phase. From this point the contraction phase starts.
(Take note: the peak is NOT a phase, but a point on the business cycle)

(2) DOWNSWING/CONTRACTION
Decrease in economic activities and a downward movement along the business cycle.
• Recession
- Slowdown in the economic activities over time.
• Depression
- Severe slowdown of economic activities, the economic growth get close to zero.
• Trough
- Economic activities are at its lowest point. It signals the end of the contraction
phase. It is a turning point indicating the start of the expansion phase.
(Take note: the trough is NOT a phase, but a point on the business cycle)

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There are THREE types of indicators:

(1) Leading indicators

- These indicators reach a peak before economic activities peaks or reach a
trough before economic activities reaches a trough.
- Leading indicators change before the cycle turned.
- Example: number of new cars sold

(2) Coincident indicators

- these activities takes place simultaneously with the changes in the economy
- Coincident indicators change with the cycle.

(3) Lagging indicators

- These activities confirm that economic activities have taken place.
- In other words, it confirms the state of the economy.
- Lagging indicators change after the cycle turned.

Reasons for business cycles:

(1) Exogenous reasons (Monetarist theory)

- Factors outside the market that influences economic activities
- Markets are inherently stable
- Market forces regulate the economy automatically (invisible hand)
- Weather conditions: droughts and floods affect agricultural production and
therefore, the total level of economic activity
- Money supply: attempts by government to influence the supply of money
(monetary and fiscal policies) disturb the market mechanism
- Inappropriate government policies causes business cycles
- Structural changes like machinery replacing manual labour causes business
cycles
- Shocks unexpected events that affects the economy, e.g. 9/11 events in the
USA, sudden oil price adjustments

(2) Endogenous reasons (Keynesian theory or interventionist theory)

- Factors within the market influences economic activities
- Markets are inherently unstable
- Continuous fluctuation of demand and supply
- Government intervention is necessary to influence the market
- Links between savings and investment, taxation and government expenditure are
indirect
- If people save or invest, less consumption will take place, thus influencing demand and supply
- If taxes increase, government have more to spend, thus influencing demand and supply
- When the economy is in a downswing, expansionary monetary policy is applied (lower
interest rate and increased money supply) and expansionary fiscal policy (decrease taxes and
reduce government spending)
- When the economy is booming, contractionary monetary policy (increased interest rates and
decrease money supply) and contractionary fiscal policy (increase taxes and decrease
government spending).

THE EFFECTS OF BUSINESS CYCLES

• Changes in aggregate supply and aggregate demand
- When the economy contracts (economic activities become less), real GDP, income and
production will fall, this will cause aggregate demand to fall.
- When the economy expands (economic activities increase), real GDP, income
and production will increase, this will cause demand to increase

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• Changes in economic growth

- Economic growth is measured in terms of real GDP.
- Increased real GDP indicates an upswing or expansionary phase.
- Decreased real GDP indicates a downswing or contractionary phase.
- If injections are larger than leakages, an upswing will occur.
- If leakages are larger than injections, a downswing will occur.

• Changes in employment rate

- An increased employment rate is generally noticed during an upswing.
- A decrease in employment levels generally noticed during a downswing.

• Changes in price levels

- Prices tend to rise towards the end of the expansionary phase (boom).
- Demand is higher than supply, producers cannot keep up with increased demand.

• Changes in the rate of exchange

- During an expansion, the current account of the balance of payments becomes
smaller.
- This happens because of the higher demand for imports, more money flowing out
of the country.
- This put pressure on the country’s foreign exchange reserves.

• Effects on people who are economically vulnerable

- Cyclical tendencies cause hardship for many people.
- When economic activities decline (downswing) the lives of disabled, children,
women, poor people, rural people and pensioners are affected negatively.

• Standard of living
- During a downswing the living standards of people decrease.
- During an upswing, the living standards of people generally increase.

TOPIC 1: MACROECONOMICS: BUSINESS CYCLES

SECTION A: TYPICAL EXAM QUESTIONS

QUESTION 1: Section A – Short Questions

HINT: When answering Section A – short question, it is important not to rush but to read the
questions carefully and to make sure you understand what the question is asking. Always
remember one alternative is completely wrong, one is nearly correct and one is totally
correct. It is easy to eliminate the completely wrong answer, but if you do not read the
question carefully the nearly correct answer will also appear correct. The answer will NEVER
be two options. Only ONE option is correct. Your answer will immediately be marked
incorrect if you write TWO options.

1.1 Various options are provided as possible answers to the following questions.
Choose the answer and write only the letter (A–D) next to the question number.

1.1.1 The period that shows a decline in economic activities is …

A recovery.
B recession.
C trend line.
D moving averages.
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1.1.2 The general direction of economic growth in a business cycle is shown by …

A leading indicator.
B the contraction phase.
C the trend line.
D amplitude

1.1.3 The lowest turning point of a business cycle is known as a …

A. recession.
B. depression.
C. peak.
D. trough.

1.1.4 The highest turning point of a business cycle is known as a …

A trough.
B recession.
C depression.
D peak.

1.1.5 An economic indicator that tells us something about how the economy will perform in
future is a …
A. lagging indicator.
B. leading indicator.
C. co-incidence indicator.
D. composite indicator.

1.1.6 During the recession phase of a business cycle, there is

A no change in economic growth
B negative economic growth
C positive economic growth
D a decrease in unemployment

1.1.7 During the recessionary phase of the business cycle, there is ...
A no change in economic growth.
B a decrease in unemployment.
C positive economic growth.
D negative economic growth

1.1.8 The … phase in the business cycle is characterised by a general

pessimism among households.
A recession
B recovery
C trough
D depression

1.1.9 When there is a negative economic growth for at least two successive quarters it is
called ...
A economic growth.
B inflation.
C a peak.
D a recession.

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1.1.10 The … phase in the business cycle is characterised by a general optimism among
households.
A recession
B recovery
C prosperity
D depression

1.1.11 An economic indicator that tells us something about an event, long after it has
happened, is called a …
A leading indicator.
B co-incidence indicator.
C lagging indicator.
D composite indicator.

1.1.12 Indicators that change at the same time and in the same direction as the economy
changes are known as … indicators.
A leading
B lagging
C composite
D co-incident

1.1.13 A diagram that shows expansion and contraction periods of economic activities is called
a(n) … cycle.
A business
B economic
C productivity
D inflationary

1.1.14 Exogenous factors such as … can cause fluctuations in the level of economic activity.
A weather patterns
B inflexibility of markets
C demand patterns
D government intervention

1.1.15 A diagram that shows expansion and contraction periods of economic activities is called a(n) …
cycle.
A business
B economic
C productivity
D inflationary

1.1.16 An indication of long-term growth in the economy is referred to as the …

A trend line.
B amplitude.
C length.
D trough.

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MEMO
1.1.1 B recession.
1.1.2 C the trend line.
1.1.3 D. trough.
1.1.4 D peak.
1.1.5 B. leading indicator.
1.1.6 B negative economic growth
1.1.7 D negative economic growth
1.1.8 B recession
1.1.9 D a recession.
1.1.10 B prosperity
1.1.11 C lagging indicator.
1.1.12 D co-incident
1.1.13 A business
1.1.14 A weather pattern
1.1.15 A business cycle
1.1.16 A trend line

1.2 Choose a description from COLUMN B that matches the item in COLUMN A.
Write only the letter (A-I) next to the question number (1.2.1 – 1.2.8) in the
ANSWER BOOK.

COLUMN A COLUMN B
1.2.1 Boom
A Show us what might happen to economic
1.2.2 Lagging indicator activity in the future
1.2.3 Leading indicators
B Refers to the ups and downs of economic
1.2.4 Recession activity in an economy / Consecutive
1.2.5 Business cycle periods of increasing and decreasing in
economic activities
1.2.6 Peak
1.2.7 Factor costs C The period of very high economic activity
just before the economy slows down
1.2.8 Exogenous
approach D A period in which there is a decline in
economic activity and prosperity

E Independent factors that influence business

cycles and originate outside the economy

F The upper turning point of a business cycle

G Show us what has happened to the

economy

H The price paid for the factors of production

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MEMO

1.2.1 A Show us what might happen to economic activity in the future

1.2.2 G Show us what has happened to the economy
1.2.3 A Show us what might happen to economic activity in the future
1.2.4 D A period in which there is a decline in eco-nomic activity and prosperity
1.2.5 B Refers to the ups and downs of economic activity in an economy /
Consecutive periods of increasing and decreasing in economic activities
1.2.6 F The upper turning point of a business cycle
1.2.7 E Independent factors that influence business cycles and originate outside
the Economy
1.2.8 G The price paid for the factors of production (8 x 1) (8)

1.3 Provide the economic term/concept for each of the following descriptions. Write only the
term/concept next to the question number. No abbreviations will be accepted.
1.3.1 The lowest turning point of a business cycle
1.3.2 The upper turning point of the business cycle
1.3.3 These are factors that affect the business cycle that originate from outside the
economic system, for example technological shocks, weather and natural disaster
1.3.4 A period in the business cycle where economic growth starts to decrease
1.3.5 The highest point of economic activity in the business cycle
1.3.6 The facilities provided to ensure that economic activities can take place for example
roads, airports and telephone lines
1.3.7 The business cycle indicators that show us what might happen to economic activity in
the future
1.3.8 The line that shows the long-term direction of a business cycle
1.3.9 Severe slowdown of economic activities, the economic growth gets close to zero
1.3.10 The distance between the trend line and the peak and trough
1.3.11 An indication that an increase in economic activities has started
1.3.12 These activities confirm that economic activities have taken place. In other words, it
confirms the state of the economy. It changes after the cycle turned.
1.3.13 Stipulate that exogenous reasons cause economic fluctuations. Inappropriate
government policies, weather and structural changes in the economy cause business
cycles
1.3.14 Stipulate that endogenous reasons cause economic fluctuations. Markets are inherently
unstable. Government intervention is necessary.

MEMO
1.3.1 Trough
1.3.2 Peak
1.3.3 Exogenous factors
1.3.4 Recession
1.3.5 Peak
1.3.6 Infrastructure
1.3.7 Leading indicators
1.3.8 Trend line
1.3.9 Depression
1.3.10 Amplitude
1.3.11 Recovery phase
1.3.12 Lagging indicator
1.3.13 Monetarist view
1.3.14 Keynesian view
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SECTION B

QUESTION 2:

HINT: When the question requires you to “list” or “name”, you need not write a sentence but
merely one or two words. This MUST be done in bullet form. This types of questions are
applicable for 2.1.1, 3.1.1 and 4.1.1

2.1 Explain how an upswing will affect economic growth rate of a country.
During an upswing, businesses produce more goods to match the rising demand
so this increases the GDP of the country which translates to economic growth. √√
(1 x 2) (2)

2.2 How is the trend line used in business cycles?

The trend line is a line that indicates the general direction of the country’s economic
growth over a long period √√
(Accept any other correct relevant answer) (1x2) (2)

2.3 How are business cycles measured? (1x2) (2)

From peak to peak or through to through√√

2.4 Name the TWO periods in a business cycle. (2 x 1) (2)

• Contraction/downswing √
• Expansion/upswing √

2.5 Name TWO phases of business cycles. (2 x 1) (2)

• Recession phase √
• Prosperity phase √
• Recovery phase √
• Depression phase √

2.6 Name any TWO types of business cycle indicators used in forecasting economic
activities. (2 x 1) (2)
• Leading indicators √
• Lagging indicators √
• Coincident indicators √
• Composite indicators √

2.7 Name the TWO views why business cycles occur. (2 x 1) (2)
• Monetarist approach (exogenous) √
• Keynesian approach (endogenous√

QUESTION 3:

HINT: This types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2

3.1 What is the purpose of a trend line in a business cycle? (1 x 2) (2)

The trend indicates the general direction in which indexes move, that were used in the business
cycle √√
(Accept any other correct relevant response)

3.2 What happens during the depression phase.

Businesses shutdown, people lose jobs and unemployment is very high. √√ (2)
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3.3 How does Monetarist approaches on business cycles? (1 x 2) (2)

Monetarists believe that fluctuations in a business cycle are caused by external factors √√

3.4 How does Keynesians approach on business cycles?

Keynesians believe that fluctuations are caused by internal factors √√ (1 x 2) (2)

3.5 What effect will a recession have on business activities (1x2) (2)
When recession starts, output, income and investment will decline√√

DATA RESPONSE

HINT: All section B questions have TWO data interpretation questions – each total 10
marks. Section B consist of Questions 2-4 not as numbered in this document

QUESTION 4:

4.1 Study the diagram and answer the question that follow

4.1.1 Provide the diagram above with an appropriate heading. (1)

4.1.2 Name the lowest point, C, in the diagram above. (1)
4.1.3 Briefly describe the term trend line. (2)
4.1.4 Describe the effect of a depression on employment levels. (2)
4.1.5 How is the economy affected during the prosperity phase? (2 x 2) (4)

4.1 DATA RESPONSE

4.1.1 Provide the above diagram with an appropriate heading.

Business cycle√ (1)

4.1.2 Name the lowest point, C, in the diagram above.

Trough √ (1)

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4.1.3 Briefly describe the term trend line.

This is a line showing the general direction of economic activity √√
(Accept any other correct relevant response.) (2)

4.1.4 Describe the effect of a depression on employment levels.

During a depression many companies scale down on their production and ultimately
many workers are retrenched causing massive unemployment √√
(Accept any other correct relevant response.) (2)

4.1.5 How is the economy affected during the prosperity phase?

The economy is affected due to:
• This is a time of general optimism and consumer spending √√
• Output and economic activity increase and entrepreneurs expand their
businesses √√
• Employ more people and buy equipment √√.
• Profits increase as well as wages and prices√√
• Consumer demand rises which stimulates greater production √√
(Accept any other correct relevant response.) (2 x 2) (4)

4.2 Study the graph and answer the question that follow

4.2.1 What is the name of the graph above? (1)

4.2.2 Which point on the graph may be associated with the lowest GDP? (1)
4.2.3 Briefly describe the term economic growth. (2)
4.2.4 Briefly explain the effect of business cycles on economic growth. (2)
4.2.5 How can government reduce unemployment in an economy? (2 x 2) (4)

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Data Response

4.2.1 What is the name of the graph above?

Business cycles √ (1)

4.2.2 Which point on the graph may be associated with lowest GDP?
D√ (1)

4.2.3 Briefly describe the term economic growth.

It is the increase in the value of goods and services produced over a period of time,
measured in terms of real gross domestic product. √√ (2)

4.2.4 Briefly explain the effect of business cycles on economic growth.

During periods of downswings the economy has a negative growth, while during
periods of upswings the economy has a positive growth. √√ (2)

4.2.5 How can government reduce unemployment in an economy?

• The government can invest in job creation initiatives like the Expanded Public
Works Programme √√
• The government can invest in education and training to address skills shortages in
the country √√
(Accept any other correct relevant answer) (2 x 2) (4)

4.3 Study the diagram and answer the questions that follow

4.3.1 Name the positively sloped straight line on the above graph. (1)
4.3.2 What is the distance from peak to trough called? (1)
4.3.3 Briefly describe the term at constant prices. (2)
4.3.4 Briefly describe a feature of the depression phase. (2)
4.3.5 How does Monetarist and Keynesian approaches on business cycles
differ? (2 x 2) (4)

4.3 DATA RESPONSE

4.3.1 Name the positively sloped straight line on the above graph.
Trend line √ (1)

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4.3.2 What is the distance from peak to trough called?

Amplitude √ (1)

4.3.3 Briefly describe the term at constant prices.

These are prices of goods and services that have been adjusted for inflation √√ (2)

4.3.4 Briefly describe a feature of the depression phase.

Businesses shutdown, people lose jobs and unemployment is very high. √√ (2)

4.3.5 How does Monetarist and Keynesian approaches on business cycles differ?
• Monetarists believe that fluctuations in a business cycle are caused by external
factors √√
• Keynesians believe that fluctuations are caused by internal factors √√ (2 x 2) (4)
4.4 Study the diagram and answer the questions that follow

4.4.1 Identify the trend line in the business cycle above. (1)
4.4.2 Which letter represents a trough in the diagram above? (1)
4.4.3 Briefly describe the term business cycle. (2)
4.4.4 Explain economic activity during phase EF in the business cycle. (2)
4.4.5 How can the length (BF) be used in forecasting of business cycles? (2 x 2) (4)

DATA RESPONSE

4.4.1 Identify the trend line in the business cycle.

K√ (1)

4.4.2 Which letter represents a trough in the diagram?

D√ (1)

4.4.3 Briefly describe the term business cycle.

Successive periods of expansion and contraction √ in economic activities √
(Accept any other correct relevant description) (2)

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4.4.4 Explain economic activity during phase EF in the business cycle.

• Economy is growing and improving rapidly √√
• More businesses open up and more workers are hired √√
• Increased demand for credit which increases interest rates √√
• Higher demand and higher prices for capital goods √√
• Profits and salaries increase √√
• Higher inflation √√
(Accept any other correct relevant response) (2)

4.4.5 How can the length (BF) be used in forecasting of business cycles?
• Because the length remains relatively constant, one can forecast that the next cycle
will be of a similar length √√
• If a business cycle has a length of 12 years, it can be predicted that 12 years will
pass between successive peaks or troughs or that it will take 6 years for the
economy to pass through a recession √√
• Longer cycles show strength which will indicate that the next cycle will also be strong
(or vice versa) √√
(Accept any other correct relevant response) (2 x 2) (4)

4.5 Study the diagram and answer the questions that follow.

4.5 Study the diagram and answer the questions that follow.
4.5.1 What is the direction in which indexes move called? (1)
4.5.2 Which model is illustrated in the diagram above? (1)
4.5.3 Briefly describe the term business cycle. (2)
4.5.4 Describe the peak of a business cycle. (2)
4.5.5 Why is it important to determine the amplitude? (2x2) (4)

4.5 Study the diagram and answer the questions that follow.

4.5.1 What is the direction in which indexes move called?

Trend line√ (1)

4.5.2 Which model is illustrated in the diagram above?

Business Cycle √ (1)

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4.5.3 Briefly describe the term business cycle.

Business cycle is the successive periods of growth and decline in
economic activities√√
(Accept any other correct relevant description) (2)

4.5.4 Describe the peak of a business cycle.

It is the highest point between the end of economic expansion and the start
of a recession / the upper turning point of the cycle √√ (2)

4.5.5 Why is it important to determine the amplitude?

• To determine the extent of change. √√
• To measure the distance of the peaks and troughs from the trend.√√ (2x2) (4)

4.6 Study the diagram and answer the questions that follow

4.6.1 Identify the longest period (months) in which South Africa experienced an upswing in
the economy. (1)
4.6.2 How long (years) is the current downswing of the South African economy? (1)
4.6.3 Briefly describe the term economic trend. (2)
4.6.4 Why are long upward amplitudes preferred than long downward amplitudes in the
economy? (2)
4.6.5 How can the South African government use open market transaction to overcome the
above ongoing economic decline? (4)

4.6 Data response

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4.6.1 Identify the longest period (months) in which South Africa experienced an
upswing in the economy.
99/100√ (1)

4.6.2 How long (years) is the current downswing of the South African economy?
5 years√ (1)

4.6.3 Briefly describe the term economic trend.

The indicates the general pattern or direction of the economy. √√ (2)

4.6.4 Why are long upward amplitudes preferred than long downward amplitudes in the
economy?
• The long upward amplitudes coincide the successive economic performance which
is characterise by high investments and increased consumption patterns. √√
• The long downward amplitudes are not preferred because they coincide with the
decline in economic performance which is characterised by weak consumption and
lack of investments in the economy. √√ (2)

4.6.5 How can the South African government use open market transaction to overcome
the above ongoing economic decline?
• The South African Reserve Bank can buy financial securities such as shares/ bonds
from commercial banks which can increase the quantity of money available in the
circulation for credits. √√
• The buying of financial securities is normally accompanied by lower interest rates
that make credit cheaper to accelerate economic activities. √√ (4)

4.7 Read the article and answer the questions that follow

4.7.1 Which is the depression that is referred to as a major depression in the passage? (1)
4.7.2 Explain the term depression. (1)
4.7.3 Briefly discuss any TWO characteristics of a depression and a recession. (4)
4.7.4 Briefly describe the characteristics of a boom or prosperity phase. (4)

4.7 Data response

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4.7.1 Which is the depression that is referred to as a major depression in the passage?
Great Depression 1929 √ (1)

4.7.2 Explain the term depression.

The prolonged recession caused by a downturn in the economy√ (1)
(Accept any other relevant response.)

4.7.3 Briefly discuss any TWO characteristics of depression and recession.

• A drop in production for a long time√√
• Unemployment and bankruptcy rise. √√
• Reduced demand for goods and services √√
• Prices and profits dropping to low levels √√
• Closure of businesses √√
(Accept any other relevant response.) (2 x 2) (4)

4.7.4 Briefly describe the characteristics of a boom or prosperity phase.

• High level of spending by households √√
• More income for households √√
• Reduction in unemployment √√
• New business springs up √√
• More production for services √√
• Profits and prices rising
• Interest rates rising up to combat rampant inflation √√
(Accept any other relevant response.) (2 x 2) (4)

4.8 Study the cartoon and answer the questions that follow

4.8.1 Identify the phase of the business cycle as well as an economic activity from the
cartoon above. (2)
4.8.2 Why do you think that ‘jobless’ will not lead to an economic ‘take-off’? (2)
4.8.3 Which business cycle indicator does ‘jobless’ refer to? (2)
4.8.4 How would you describe the recovery phase of a typical business cycle? (4)

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4.8 DATA RESPONSE

4.8.1 Identify the phase of the business cycle as well as an economic activity from the
cartoon above.
Recovery phase √ and jobless √ (2)

4.8.2 Why do you think that ‘jobless’ will not lead to an economic ‘take-off’?
Because there is a high percentage of jobless (unemployed) people in South Africa √√
(Accept any other relevant response) (2)

4.8.3 Which business cycle indicator does ‘jobless’ refer to?

Co- incident √√ (2)

4.8.4 How would you describe the recovery phase of a typical business cycle?
• Exports will start to increase, resulting in an increase in production √√
• Businesses start to hire a few more people and order raw material √√
• Businesses might even take out more loans from financial institutions √√
• Economic activities in the country slowly start to increase √√
(Any other relevant response) (Any 2 x 2) (4)

4.9 Study the graph and answer the questions that follow

4.9.1 Identify the trough in the business cycle above. (1)

4.9.2 What is the line labelled called in economics? (1)
4.9.3 Describe the term business cycle. (2)
4.9.4 Explain the recovery phase of a typical business cycle. (2)
4.9.5 What can the government do to smooth out a severe decrease in the business
cycle? (4)

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Gr 10 Chapter 3 = Business cycles - memo

DATA RESPONSE

4.9.1 Identify the trough in the business cycle above

A√ (1)

4.9.2 What is the line labelled called in economics?

Trend line √ (1)

4.9.3 Describe the term business cycle.

A business cycle is a consecutive period of increasing and decreasing economic
activities. √√
(Any other relevant definition) (2)

4.9.4 Explain the recovery phase of a typical business cycle.

• Manufacturing production increases √√
• Interest rates fall further √√
• Inflation decreases √√
• Rand appreciates and exports grow. √√
(Any relevant response) (2)

4.9.5 What can the government do to smooth out a severe decrease in the business
cycles?
• The government should decrease taxes √√
• Decrease the interest rates √√
• Allow the exchange rate to appreciate √√ (Any 2 x 2) (4)

4.10 Read the article and answer the questions that follow

4.10.1 Identify the business cycle phase in the above extract. (1)
4.10.2 Which government department would best be able to assist the President with
implementing the stimulus package to help get the economy growing again? (1)
4.10.3 Briefly describe the term business cycle. (2)
4.10.4 Why can we expect job losses during this economic phase? (2)
4.10.5 Advise the president on which fiscal policy measures he could use to stimulate the
economy. (2 x 2) (4)
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Gr 10 Chapter 3 = Business cycles - memo

4.10 Data Response

4.10.1 Identify the business cycle phase in the above extract.

Recession / Economic downturn / Contraction √
(Accept any other correct relevant response) (Any 1 x 1) (1)

4.10.2 Which government department would best be able to assist the president with
implementing the stimulus package to help get the economy growing again?
Finance Department √ (1)

4.10.3 Briefly describe the term business cycle.

These are indications of fluctuations in economic activities reflecting upswings for
growth and downswings when there is negative growth. √√
(Accept any other correct relevant response) (2)

4.10.4 Why can we expect job losses during this economic phase?
Lower production levels result in a lower demand for labour. √
(Accept any other correct relevant response) (2)

4.10.5 Advise the president on which fiscal policy measures he could use to stimulate
the economy.
• Government could reduce taxes so that businesses are left with more money
after tax. This money could be used to buy more raw materials. √√
• Increase government spending so that more money is injected into the
economy and is in circulation. √√
(Accept any other correct relevant response) (2 x 2) (4)

QUESTION 5 Paragraph type questions – Middle Cognitive

5.1 Discuss the Prosperity phase of the business cycle

• There is an increase in real GDP ✓✓
• Firms make high profits and this attracts other business to enter the market ✓✓
• As more businesses open, more factors of production are employed. ✓✓
• The increase in income causes an increase in aggregate demand which in turn forces
producers to increase output. ✓✓
• Increased output causes an increase in investment spending as producers expand their
businesses and buy more inventories. ✓✓
(Accept any other relevant answers) (4 x 2) (8)

5.2 Write notes to explain the Recession phase of the business cycle
• This phase follows immediately after the peak. ✓✓
• It is a phase where economic activity starts to slow down. ✓✓
• It is called economic downturn. ✓✓
• It occurs when there is a continuous decrease in economic activity for a period of six
consecutive months or two quarters. ✓✓
• Jobs are lost / employment levels drop. ✓✓
• Aggregate demand falls. ✓✓
• The value of money depreciates. ✓✓
• Inflation increases ✓✓
• Interest rates will increase, discouraging the demand for credit. ✓✓
(Accept any other relevant answers)
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Gr 10 Chapter 3 = Business cycles - memo

5.3 Explain the Depression phase of the business cycle.

• During this phase many businesses close down resulting in low output. ✓ ✓
• Aggregate demand decreases due to many people having little or no income. ✓✓
• When economic activity is at its lowest, a trough is reached ✓✓
• Business sentiment is depressed. ✓ ✓
• Low demand for credit. ✓ ✓
• Share prices start to increase. ✓✓
(Accept any other relevant answers)

5.4 Discuss the Recovery phase of the business cycle

• This phase follows immediately after the trough. ✓✓
• It shows that the economy is growing after the contraction. ✓✓
• The recovery is slow, but it accelerates until it enters the prosperity phase. ✓✓
• Production increases and more jobs are created. ✓✓
• Business sentiment rises and there is increased spending by firms. ✓✓
• Exports increase and the value of money appreciates. ✓✓
• Inflation decreases. ✓✓
(Accept any other relevant answers)

5.5 Discuss the difference between exogenous and endogenous reasons for changes
in the business cycle

Exogenous reasons:
• Exogenous reasons ✓✓are reasons for business cycles that originate outside the market
system.
• Changes in weather conditions affect the output of the agricultural sector and tourism
industry of an economy and the total level of economic activity. ✓✓
• When the economy has structural change, it affects production, employment, investments,
government expenses, taxes, imports and exports. ✓✓
• Variations in the money supply also cause business cycles. ✓✓
• Random shocks can cause business cycles e.g., war, sudden increase in the price of oil,
natural disasters etc. ✓✓
• Political actions such as when the government wants to win election votes, will adopt an
expansionary policy and after the election the inflationary effects of this expansionary policy
begins. ✓✓
(Accept any other relevant responses) (any 2 x 2) (4)

Endogenous factors
• They are factors that are part of the economic system. √√
• The expansion phase also contains mechanisms that eventually cause a contraction of
economic activity. √√
• As the level of economic activity increases total spending in the economy increases as
well.√√
• This causes an increase in imports which negatively affects the balance of payments and
leads to a depreciation of the exchange rate. √√
• Increase in interest rates due to increased borrowing (negative effect on the economy). √√
• Positive perceptions of the economy will lead to an increase in spending and vice versa. √√
(Accept any other relevant responses) (any 2 x 2) (4)

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Gr 10 Chapter 3 = Business cycles - memo

5.6 Distinguish between leading and lagging economic indicators.

• Leading economic indicators are indicators that change before the economy
changes √√
• They are the most important type of indicator for investors because they
help to predict what economy will be like in the future √√
• Lagging economic indicators are indicators that change direction only
after the economy does √√
• The unemployment rate is a lagging economic indicator because
unemployment tends to decrease for two or three quarters after the
economy starts to improve √√
(Accept any other relevant response) (Any 2 x 4) (8)

5.7 Discuss the Monetarist approach as a cause of business cycles.

• Also called the sunspot theory / exogenous approach √√
• Believe markets are inherently stable. √√
• Departures from the equilibrium state are caused by factors outside of the market
system. √√
• Market forces (supply and demand) kick in and bring the economy back to its
natural state or equilibrium route.√√
• These interferences are not part of the normal forces operating in the market.√√
• Governments should not interfere in the markets. √√
• Major cause of economic fluctuations are inappropriate government policies √√,
undesirable increases and decreases in money supply √√
o weather conditions √√
o shocks (September 11) √√
o structural changes √√
o severe increases in the price of
o fuel √√ and wars√√
(Maximum 4 marks for examples) (Any 4 x 2) (8)

5.8 Discuss lagging indicators as a feature underpinning forecasting.

(They can ask any of the THREE indicators on its own) (Then you must know at least 4 facts)
• Serve to confirm the behaviour of the coincident indicators √√
• If it does not confirm the upswing or downswing, for instance, it signals that the
upswing or downswing is weak and will most likely end at an early stage√√
• Change direction after reference turning points in the business cycle has been reached√√
• Confirm changes that were first indicated by the leading indicators and then the coincident
indicators√√
• Provide an advance signal of a turning point in the business cycle√√
• First to reflect imbalances that intensify (increase) or subsidise (decrease) in the economy √√
• Influence of movements on subsequent movements in the leading indicators help explain the
view that one business cycle generates the next one√√ (8)

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Gr 10 Chapter 3 = Business cycles - memo

QUESTION 6

6.1 Evaluate the effects of the business cycle on the economy

1. Changes in aggregate supply and demand

• In a recovery period people will demand more.
• This may lead to shortages of goods and services to meet the demand, then
business will have to produce more to meet the demand for goods and
services.
• In a recession there will be a decrease in demand for goods and services due to
the high unemployment rate, then businesses need to reduce their
production.

2. Changes in economic growth

• In a downswing, there will be less economic growth, businesses will produce
less.
• In an upswing there will be economic growth, businesses will have to produce
more to meet the growing demand for goods and services.

3. Changes in employment
• In a downswing phase, businesses will produce less which results in people
losing their jobs, unemployment increases.
• In an upswing phase of business cycle, businesses will produce more goods and
services and employ more people, employment increases.

4. Changes in prices.
• In a downturn of the economy, prices are usually quite high and may
increase.
• People may not afford the goods and services anymore and will buy fewer goods
and services

5. Changes in the exchange rate

• In a downswing there is a decrease in demand for a country’s goods and
services and a decrease in exports.
• In an upswing there is an increased demand for a country’s currency. More
people are buying the country goods and services. This leads to the purchasing
power gaining value. (8)

6.2 How do business cycle fluctuations affect employment in the economy?

• Like a depression, a recession leads to joblessness, reduced production, reduced
incomes, and lower living standards. √√
• Employment is the total number of people currently working for pay, and
unemployment is the total number of people who are actively looking for work but
aren’t currently employed. √√
• A country’s labour force is the sum of employment and unemployment. √√
• The unemployment rate, which is the percentage of the labour force that is
unemployed, is usually a good indicator of what conditions are like in the job
market. √√
• A high unemployment rate signals a poor job market in which jobs are hard to find.
√√

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Gr 10 Chapter 3 = Business cycles - memo

• A low unemployment rate indicates a good job market in which jobs are relatively
easy to find. √√
• In general, during recessions the unemployment rate rises, and during expansions it
falls. √√
(Accept any other relevant answer.) (Any 2 x 4) (8)

6.3 How can injections contribute towards the economic upswing?

• Improvement in the standard of living of people in the economy √√
• Both exports and investments will lead to more money flowing into SA √√
• More production in SA will benefit the SA economy √√
• More jobs are created √√
• Improvement in the infrastructural development √√
(Accept any relevant response) (4.x.2) (8)

6.4 Explain how endogenous (Keynesian) factors influence economic fluctuation.

• They are factors that are part of the economic system. √√
• The expansion phase contains mechanisms that eventually cause a contraction
of economic activity. √√
• As the level of economic activity increases, total spending in the economy
increases as well. √√
• This causes an increase in imports which negatively affects the balance of
payments and leads to a depreciation of the exchange rate. √√
• Increased borrowing leads to increase in interest rates (negative effect on the
economy). √√
• Positive perceptions of the economy will lead to an increase in spending and vice
versa. √√
(Accept any relevant response) (4 x 2) (8)

6.5 Highlight the effects of business cycles to the economy. (10)

• Aggregate supply increases during a boom and decreases during a recession while an
aggregate demand also changes between these phases
• Economic growth increases during an expansion and decreases during a recession
• Employment increases during an upswing and decreases during a downswing
• Prices increase as the economy expands and decrease as the economy contracts as
businesses are aware of the buying power of consumers
• Exchange rates improve as the economy grows and deteriorate as the economy
stagnates
(Accept any other correct relevant answer) (4 x 2) (8)

6.6 Evaluate the endogenous reasons for changes in the business cycle.
• The Keynesian (endogenous) view is that markets are inherently unstable therefore
government interventions are necessary to stabilise the economy. √√
• They argue that changes in the value of total expenditure brings about changes in
demand. √√
• Government can intervene through fiscal policy which includes taxes to stimulate economic
activity. √√
• During a recession, government can increase its spending and reduce taxes to stimulate
economic activity. √√
• This will increase the level of economic activity, e.g. production, employment, income and
demand. √√
• During a peak the government can increase taxes and reduce government spending. √√

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Gr 10 Chapter 3 = Business cycles - memo

6.7 Why are leading indicators important in forecasting business cycles? (8)
• Leading indicators are important in forecasting because:
• They predict when the next change in the business cycle will be √√
• They are being used to gain some sense of where the economy is headed √√
• Investors are using them to adjust their strategy to benefit from future market
conditions that will affect their revenue √√
• Businesses are using them to anticipate economic conditions √√
• Policy makers are using them for considering adjustments to monetary policy √√
(Accept any other correct relevant answer.)
(Allocate a maximum of 2 marks for the mere listing of facts/examples.)

6.8 In your opinion what can the government do when the economy is in a
recession?
• The government can influence the economy by:
• adopting an expansionary fiscal policy in an attempt to contain the economic
slump√√
• stimulating economic activities, E.g., Attracting DFI, Progressive fiscal policy, Plans
and strategies to grow the economy√√
• increasing government spending, E.g., Allocation of funds for expansion of
economic activities√√
• reducing the level of taxes to increase the level of disposable income and
consumption expenditure, E.g., Reducing of personal income tax and company
tax√√
(Accept any other correct relevant answer) (8)

SECTION C
Answer ONE of the two questions from this section in the ANSWER BOOK.
Your answer will be assessed as follows:

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Gr 10 Chapter 3 = Business cycles - memo

QUESTION 7
• Discuss in detail the phases of business cycle with the aid of a diagram. (26)
• Evaluate the endogenous reasons for changes in the business cycle (10)
[40]

INTRODUCTION
Business cycle is a consecutive period of increasing and decreasing economic activities.

MAIN PART
Prosperity phase √
• Optimism encourages entrepreneurs to borrow money and to buy new machinery. √√
• More people are employed and production increases. √√
• Prices, wages, interest rate and profits increase. √√
• Factories work overtime and skilled labour becomes extremely scarce. √√
• When the boom starts everything seems to go to the extreme. √√
• Interest rates, salaries and wages increase to even higher levels and there is a much
greater demand for raw materials, costs of businesses increase almost beyond
control. √√
• Inflation accelerates beyond previous high levels. √√
• Some businesses start to realise that the prosperity phase cannot last forever. √√
• But there are no clear disturbances yet. √√

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Gr 10 Chapter 3 = Business cycles - memo

The recession phase √

• Businesses start to prepare for bad times by trying to repay the larger part of their
loans. √√
• They selectively lay off workers. √√
• Spending by households and profits of businesses start to decrease. √√
• Inflation is high and the central bank reduces the quantity of money and credit in the
economy and increases interest rates √√ in other words, the central bank applies a
stricter monetary policy. √√
• Households find it difficult to buy goods on credit and to pay bonds, and banks insist
that business enterprises repay the loans that were granted during the boom. √√
• Spending on durable consumer goods and capital equipment is greatly reduced and
unemployment increases. √√
• Some businesses start to show losses. √√

The depression phase

• This phase is characterised by general pessimism (expecting the worst) by households
and businesses. √√
• The spending of all sectors in the economy decreases drastically and consists mainly of
expenditure on consumer goods. √√
• Businesses show poor profits, many make losses, and some go bankrupt. √√
• Households that cannot pay their debts have their furniture, motorcars, and even their
houses repossessed. √√
• Many people find work in the informal sector. √√
• The main objective of households is to provide for their basic needs (food, shelter and
clothing). √√
• Because of the reduction in demand, inflation also decreases, and interest rates fall. √√
• At a certain stage businesses start to realize that conditions are going to improve at
some time, and they take the first actions that will eventually lead to the recovery. √√

The recovery phase √

• Businesses realise that conditions are going to improve and start to service their
machinery and improve equipment. √√
• They increase their production slightly to provide stock for a possible increase in
demand. √√
• They make better use of their labour and even employ new workers. √√
• Because businesses purchase more goods and services and employ a greater number
of people, there is an increase in income and spending in the economy. √√
• Because interest rates are low, household bond repayments and other instalments are
low, and so households have more money to spend. √√
• Loans are available but households and business enterprises are still not keen to
borrow. √√
• As soon as sales improve, business profits increase. √√
• Entrepreneurs become more optimistic. √√ (26)

Additional part
Evaluate the endogenous reasons for changes in the business cycle.
• The Keynesian (endogenous) view is that markets are inherently unstable therefore
government interventions are necessary to stabilise the economy. √√
• They argue that changes in the value of total expenditure brings about changes in
demand. √√
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Gr 10 Chapter 3 = Business cycles - memo

• Government can intervene through fiscal policy which includes taxes to stimulate
economic activity. √√
• During a recession, government can increase its spending and reduce taxes to
stimulate economic activity. √√
• This will increase the level of economic activity, e.g., production, employment, income
and demand. √√
• During a peak, the government can increase taxes and reduce government spending.
√√ (10)

Conclusion
Endogenous changes in the business cycle are based on events in the economy and
are interlinked and can affect each other. √√ (2)
[40]

QUESTION 8

Every country experiences cyclic patterns in its economy.

• With the aid of a diagram discuss the phases / stages of a business cycle. (26 marks)
• Explain the endogenous reason (Keynesian theory) for business cycles. (10 marks)
[40]
INTRODUCTION
● Business cycles are defined as consecutive periods of increasing and decreasing
economic activities.
● Continuous change in the level of economic activities that has a repetitive pattern of
expansion and contraction in production, income and consumption over a number of
years.
(Accept any other relevant introduction / definition.) (Max. 2)

BODY: MAIN PART

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Gr 10 Chapter 3 = Business cycles - memo

BUSINESS CYCLE

● Heading= 1 mark
● Trend line= 1 mark
● Peak= 1 mark
● Trough= 1 mark
● Labeling of axis= 2 marks
TOTAL MARK: (6)

1. Prosperity phase 
● There is an increase in real GDP.
● Firms make high profits and this attracts other business to enter the market.
● As more businesses open, more factors of production are employed.
● The increase in income causes an increase in aggregate demand which in turn forces
producers to increase output.
● Increased output causes an increase in investment spending as producers expand their
businesses and buy more inventories.
(Accept any other relevant answers)

2. Recession phase
● This phase follows immediately after the peak.
● It is a phase where economic activities start to slow down.
● It is called economic downturn.
● It occurs when there is a continuous decrease in economic activity for a period of six
consecutive months or two quarters.
● Jobs are lost / employment levels drop.
● Aggregate demand falls.
● The value of money depreciates.
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Gr 10 Chapter 3 = Business cycles - memo

● Inflation increases.
● Interest rates increase, discouraging the demand for credit.
(Accept any other relevant answers)

3. Depression phase
● During this phase many businesses close down resulting in low output.
● Aggregate demand decreases due to many people having little or no income.
● When economic activities are at its lowest, a trough is reached.
● Business sentiment is depressed.
● Low demand for credit.
● Share prices start to increase.
(Accept any other relevant answers)

4. Recovery phase
● This phase follows immediately after the trough.
● It shows that the economy is growing after the contraction.
● The recovery is slow but it accelerates until it enters the prosperity phase.
● Production increases and more jobs are created.
● Business sentiment rises and there is increased spending by firms.
● Exports increase and the value of money appreciates.
(NB: Accept explanation of peak, trough, expansion, contraction)
A minimum of 20 marks is allocated to different stages of the business cycle
and 6 marks awarded for diagram. (Max 26)

ADDITIONAL PART

Explain the endogenous reasons (Keynesian theory) for business cycles

• The Keynesian view is that markets are inherently unstable. 
• The level of economic activities constantly and erratically overshoots and undershoots
the economy potential. 
• The price mechanism fails to coordinate demand and supply of goods and services. 
• Prices are simply not flexible enough to be adjusted downwards. 
• These mismatches cause business cycles. 
• The government should intervene to smooth peaks and troughs as they occur.
(10)
Conclusion
• Business cycles can be used to determine economic activities
• Business cycles can be used by economists and everybody in understanding the state
of the economy
(Any other relevant conclusion) (Max 2)
[40]

QUESTION 9
• Discuss briefly the phases of the business cycle. (26)
• Explain how endogenous (Keynesian) factors influence economic fluctuation. (10)

INTRODUCTION
Business cycle refers to ups and downs of economic activity in an economy. √√
(Accept any other relevant definition.) (Max. 2) (2)

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Gr 10 Chapter 3 = Business cycles - memo

BODY
MAIN PART
1. PERIOD OF RECESSION √
• During a recession, unemployment increases due to the fact that businesses have to lay
off workers. √√
• There is a decline in economic activity, and the economy slows down. √√
• Consumer spending decreases, especially on durable goods. √√

2. PERIOD OF DEPRESSION
• During a depression, money is in short supply, leading to a further decline
in spending. √√
• There is a negative impact on investment spending. √√
• When economic activity is at its lowest, a trough is reached. √√
• There is competition for jobs and the cost of production decreases. √√
• This encourages foreign trade and leads to a recovery. √√

3. PERIOD OF RECOVERY
• During a recovery period, production increases and more jobs are created. √√
• Consumers start buying durable goods again. √√
• Business confidence rises and there is increased spending by firms. √√
• There is increased economic activity and the country enters into period of
prosperity. √√

4. PERIOD OF EXPANSION
• During a period of expansion there is a great degree of optimism √√
• Employment levels rise, salaries and wages rise and spending increases √√
• A peak is reached. √√
• A larger amount of money is in circulation and this leads to an inflationary
situation. √√
(Accept any relevant fact) (Max. 26)

ADDITIONAL PART
Explain how endogenous (Keynesian) factors influence economic fluctuation.
• They are factors that are part of the economic system. √√
• The expansion phase contains mechanisms that eventually cause a contraction
of economic activity. √√
• As the level of economic activity increases, total spending in the economy
increases as well. √√
• This causes an increase in imports which negatively affects the balance of
payments and leads to a depreciation of the exchange rate. √√
• Increased borrowing leads to increase in interest rates (negative effect on the
economy). √√
• Positive perceptions of the economy will lead to an increase in spending and vice
versa. √√
(Accept any relevant response) (Max. 10)

CONCLUSION
Fluctuations in business cycles should be managed so that they affect a country’s
economy positively. √√
(Accept any other relevant conclusion.) (Max. 2) [40]
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Gr 10 Chapter 3 = Business cycles - memo

QUESTION 10
Economists have found that there is a more or less continuous pattern in which an economy
grows.
• Discuss in detail the phases of business cycles. (26)
• Highlight the effects of business cycles to the economy. (10)
[40]
INTRODUCTION
Business cycles are alternating periods of expansion and contraction in economic
activity over a period of time, normally a year √√
(Accept any other correct relevant answer) (Max 2)

Body
MAIN PART

Prosperity phase√
• This is a time of general optimism and increased consumer spending√√
• Output and economic activity increases, and entrepreneurs expand their businesses,
employ more people and buy equipment √√
• Profits increase as well as wages, and the prices of goods and services √√
• Consumer demand rises which stimulates greater production and increased demand for
raw materials √√
• This can also be called the economic boom period √√
• People spend freely using all the credit available to them √√
• Inflation begins to increase and the central bank increases interest rates so as to
reduce the demand for credit by consumers and firms
• The increase in inflation and interest rates gradually causes a decrease in consumer
and investment spending
• The boom is ultimately over

Recession phase√
• Businesses reduce production as consumer spending drops √√
• Some firms start to lay off workers and so produce less √√
• This causes the downswing to accelerate further √√
• This makes it difficult for consumers and business to pay off their loans √√
• Unemployment increases as businesses, especially those producing durable goods and
capital equipment struggle to survive the drop in demand √√
• This was especially obvious in the decline in the sales of new motor vehicles in the
recession of 2007-2009 in South Africa √√

Depression phase√
• If the output continues to fall for over a year, we say the economy is in a depression
which is a time of general pessimism √√
• There is widespread unemployment as profits drop, businesses reduce production and
many firms close √√
• Households are unable to pay their debts and houses, motor cars and furniture are
repossessed by banks √√
• Many people try to create their own jobs in the informal sector √√
• The rate of inflation drops as firms try to encourage sales with lower prices √√
• The central bank continues to reduce interest rates in an effort to stimulate expenditure
by households and firms √√
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Gr 10 Chapter 3 = Business cycles - memo

Recovery phase√
• Eventually firms and households begin to replace worn-out capital and consumer goods
and slowly the economy begins to recover√√
• Businesses take advantage of the low interest rates and start to buy more equipment
and increase production√√
• Also the government may cut taxes and increase its expenditure so as to encourage an
increase in the demand for the country’s output√√
• Employment increases and consumer demand picks up with the rise in incomes√√
• Prices and interest rates remain low and this encourages consumer spending to rise √√
• Gradually a feeling of optimism returns as the economy moves towards prosperity
again√√
(Accept any other correct relevant answer) (Max 26)
(Allocate a maximum of 8 marks for headings, sub-headings or examples)

ADDITIONAL PART
Highlight the effects of business cycles to the economy. (10)
• Aggregate supply increases during a boom and decreases during a recession while an
aggregate demand also changes between these phases√√
• Economic growth increases during an expansion and decreases during a recession√√
• Employment increases during an upswing and decreases during a downswing√√
• Prices increase as the economy expands and decrease as the economy contracts as
businesses are aware of the buying power of consumers√√
• Exchange rates improve as the economy grows and deteriorate as the economy
stagnates √√
(Accept any other correct relevant answer) (Max 10)

CONCLUSION
The length of business cycles can vary over time and it is measured in years. South
Africa’s business cycles have lasted much longer since the first democratic elections in
1994√√
(Accept any other correct relevant answer) (Max 2)
[40]

QUESTION 11

Economies constantly change. The economy of any country has periods of fast economic
growth and periods of slow or no economic growth.
• Discuss the phases and reasons, of business cycles. (26 marks)
• What effect do you think business cycles have on the economy? (10 marks)
[40]

INTRODUCTION
Business cycles refer to the ups and downs of economic activity in an economy. √√ (Solutions
for all Economics)
OR Business cycles are indications of fluctuations in economic activities. √√ (Focus
Economics) (Max 2)

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Gr 10 Chapter 3 = Business cycles - memo

BODY
1. Phases of Business Cycles

1.1 Period of Recession √

• During a recession, jobs are lost and there is a feeling of pessimism √√
• Employment levels drop, and there is a decrease in economic activity, and the economy
slows down √√

1.2 Period of Depression √

• During a depression money is in short supply leading to a further decline in spending √√
• There is a negative impact on investment spending √√
• When economic activity is at its lowest it is called a trough √√
• There is competition for jobs and the cost of production decreases √√
• This encourages foreign trade and leads to a recovery √√

1.3 Period of Recovery √

• During a recovery, production increases and more jobs are created √√
• Business confidence rises and there is increased spending by firms √√
• There is increased economic activity and the country enters a period of prosperity √√

1.4 Period of Expansion √

• During a period of expansion there is a great degree of optimism √√
• Employment levels rise, salaries and wages rise and spending increases √√
• A peak is reached √√
• A larger amount of money is in circulation and this leads to an inflationary situation √√

2. Reasons for Business Cycles

2.1 Exogenous factors √

• Factors that originate from outside the economic system and act as trigger mechanisms
for contractions and expansions. √√
• Examples:
o Technology shocks √
o Weather patterns √
o Governments through spending, taxation and regulations √
o Change in fashion and consumer tastes and preferences √ (Solution for all
Economics)
o Droughts √
o Famine √
o War √
o Other natural disasters √ (Focus Economics)
• Structural changes in the economy √√ (Oxford Successful Economics)
• Structural changes cause economic resources to become unneeded in one sector and
moves to another sector. √√
• Money supply refers to government either increasing or decreasing the money supply
which alters equilibrium in the markets. √√

2.2 Endogenous factors √

• They are factors that are part of the economic system. √√

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Gr 10 Chapter 3 = Business cycles - memo

• The expansion phase also contains mechanisms that eventually cause a contraction of
economic activity. √√
• As the level of economic activity increases total spending in the economy increases as
well. √√
• This causes an increase in imports which negatively affects the balance of payments
and leads to a depreciation of the exchange rate. √√
• Increase in interest rates due to increased borrowing (negative effect on the economy).
√√
• Positive perceptions of the economy will lead to an increase in spending and vice versa.
√√
Headings & examples – Max 8 single marks
(Max 26)

ADDITIONAL PART
3. What effect do business cycles have on the economy?
3.1 Changes in aggregate (total) supply and demand √
• In a recovery period people will demand more. √√
• This may lead to shortages of goods and services to meet the demand. √√
• Business will then produce more. √√
• In a recession there will be a decrease in demand for goods and services. √√
• Businesses will have a surplus and reduce production. √√
3.2 Changes in economic growth √
• In a downswing there will be less economic growth, businesses will produce less. √√
• In an upswing there will be economic growth, businesses will produce more to meet the
growing demand for goods and services. √√
3.3 Changes in employment √
• In a downswing, businesses will produce less, and the result will be people will lose
their jobs, unemployment will increase. √√
• In an upswing, businesses will produce more goods and services and employ more
people, unemployment will decrease. √√
3.4 Changes in price levels √
• In the early stages of a downturn of the economy, prices are usually quite high and may
even increase a bit. √√
• People cannot afford the goods and services anymore and will buy fewer goods and
services. √√
• This will lead to a total downswing. √√
• In the early stages of an upswing prices will be low and people will buy more goods and
services. √√
3.5 Changes in the exchange rate √
• In the early stages of a downturn of the economy there is a decreased demand for a
country’s goods and services and a decrease in exports. √√
• They would demand less of that country’s currency and this leads to depreciation or a
weakening of the currency. √√
• In an upswing in the economy there is an increased demand for a country’s currency.
More people are buying the country’s goods and services. This leads to an appreciation
of the currency. √√
3.6 Impact on the economically vulnerable √
• Downswing will deprive people of satisfying their basic needs of food, shelter and
clothing. √√
• An upswing in the economy will result in higher income and spending on luxury items.
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Gr 10 Chapter 3 = Business cycles - memo

(Max 10 marks)

CONCLUSION √√
Business cycles are long term trends and can last from 3 to 5 years or even 10 years. √√
(Any other relevant conclusion) (Max 2)
[40]

QUESTION 12
Every country experience cyclical patterns in its economy
• Discuss in detail the phases of business cycles with the use of a diagram (26)
• Explain the exogenous reasons for business cycles. (10)

INTRODUCTION
Business cycles are defined as consecutive periods of increasing and decreasing economic
activity.
Continuous change in the level of economic activities that has a repetitive pattern of expansion
and contraction in production, income and consumption over a number of years. ✓✓
(Accept any other relevant introduction / definition.) (Max. 2)

BODY: MAIN PART

Prosperity phase✓
• There is an increase in real GDP ✓✓
• Firms make high profits and this attracts other business to enter the market ✓✓
• As more businesses open, more factors of production are employed. ✓✓
• The increase in income causes an increase in aggregate demand which in turn forces
producers to increase output. ✓✓
• Increased output causes an increase in investment spending as producers expand their
businesses and buy more inventories. ✓✓
(Accept any other relevant answers)

Recession phase✓
• This phase follows immediately after the peak. ✓✓
• It is a phase where economic activity starts to slow down. ✓✓
• It is called economic downturn. ✓✓
• It occurs when there is a continuous decrease in economic activity for a period of six
consecutive months or two quarters. ✓✓
• Jobs are lost / employment levels drop. ✓✓
• Aggregate demand falls. ✓✓
• The value of money depreciates. ✓✓
• Inflation increases ✓✓
• Interest rates will increase, discouraging the demand for credit. ✓✓
(Accept any other relevant answers)

Depression phase✓
• During this phase many businesses close down resulting in low output. ✓ ✓
• Aggregate demand decreases due to many people having little or no income. ✓✓
• When economic activity is at its lowest, a trough is reached ✓✓
• Business sentiment is depressed. ✓ ✓
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Gr 10 Chapter 3 = Business cycles - memo

• Low demand for credit. ✓ ✓

• Share prices start to increase. ✓✓
(Accept any other relevant answers)

Recovery phase✓
• This phase follows immediately after the trough. ✓✓
• It shows that the economy is growing after the contraction. ✓✓
• The recovery is slow but it accelerates until it enters the prosperity phase. ✓✓
• Production increases and more jobs are created. ✓✓
• Business sentiment rises and there is increased spending by firms. ✓✓
• Exports increase and the value of money appreciates. ✓✓
• Inflation decreases. ✓✓
(Accept any other relevant answers)

Business Cycle

✓
8+18 = 26
(Accept explanation of contraction, expansion, peak, through)
A maximum of 18 marks is allocated for different phases of a business cycle and maximum of
8 marks for headings and the graph. (Max. 26)

BODY: ADDITIONAL PART

Exogenous reasons for business cycles:

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Gr 10 Chapter 3 = Business cycles - memo

• Exogenous reasons ✓✓are reasons for business cycles that originate outside the
market system.
• Changes in weather conditions affect the output of the agricultural sector and tourism
industry of an economy and the total level of economic activity. ✓✓
• When the economy has structural change, it affects production, employment,
investments, government expenses, taxes, imports and exports. ✓✓
• Variations in the money supply also cause business cycles. ✓✓
• Random shocks can cause business cycles e.g. war, sudden increase in the price of oil,
natural disasters etc. ✓✓
• Political actions such as when the government wants to win election votes, will adopt an
expansionary policy and after the election the inflationary effects of this expansionary
policy begins. ✓✓
(Accept any other relevant responses) (Max. 10)

CONCLUSION
Economic indicators such as leading indicators, coincident indicators and lagging indicators
can be used to predict business cycles. ✓✓
(Accept other relevant higher order conclusion) (Max. 2)
[40]

QUESTION 13
• Discuss briefly the phases of the business cycle. (26)
• Explain how the can endogenous (Keynesian) factors influence economic fluctuation?
(10)

INTRODUCTION
Business cycle refers to ups and downs of economic activity in an economy. √√
(Accept any other relevant definition.) (Max. 2) (2)

BODY
MAIN PART

1. PERIOD OF RECESSION √
• During a recession, unemployment increases due to the fact that businesses have to
lay off workers. √√
• There is a decline in economic activity, and the economy slows down. √√
• Consumer spending decreases, especially on durable goods. √√

2. PERIOD OF DEPRESSION √
• During a depression, money is in short supply, leading to a further decline
in spending. √√
• There is a negative impact on investment spending. √√
• When economic activity is at its lowest, a trough is reached. √√
• There is competition for jobs and the cost of production decreases. √√
• This encourages foreign trade and leads to a recovery. √√

3. PERIOD OF RECOVERY √
• During a recovery period, production increases and more jobs are created. √√
• Consumers start buying durable goods again. √√

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Gr 10 Chapter 3 = Business cycles - memo

• Business confidence rises and there is increased spending by firms. √√

• There is increased economic activity and the country enters into a period of
• prosperity. √√

4. PERIOD OF EXPANSION √
• During a period of expansion there is a great degree of optimism √√
• Employment levels rise, salaries and wages rise and spending increases √√
• A peak is reached. √√
• A larger amount of money is in circulation and this leads to an inflationary
situation. √√
(Accept any relevant fact) (Max. 26)

ADDITIONAL PART
Explain how endogenous (Keynesian) factors influence economic fluctuation.
• They are factors that are part of the economic system. √√
• The expansion phase contains mechanisms that eventually cause a contraction
of economic activity. √√
• As the level of economic activity increases, total spending in the economy
increases as well. √√
• This causes an increase in imports which negatively affects the balance of
payments and leads to a depreciation of the exchange rate. √√
• Increased borrowing leads to increase in interest rates (negative effect on the
economy). √√
• Positive perceptions of the economy will lead to an increase in spending and vice
versa. √√
(Accept any relevant response) (Max. 10)

CONCLUSION
Fluctuations in business cycles should be managed so that they affect a country’s
economy positively.
(Accept any other relevant conclusion.) (Max. 2) [

QUESTION 14
• Discuss the phases of the business cycles. (26 marks)
• How can injections contribute towards economic upswing? (10 marks) [40]

INTRODUCTION
Business cycles refer to continuous periods of expansion and contraction of
economic activity.
(Any other relevant introduction) (2)

MAIN PART
Prosperity phase
• There is an increase in the economic activities in a country √√
• There is an increase in output, the employment rate and wages √√
• People’s standards of living are improving √√
• Consumption: During prosperity consumers have more money √√
• Real GDP: Businesses make more profit because there is an increase in demand.
This attracts more entrepreneurs to enter the market, and output increases √√
• Investment: In order to produce more goods to meet demand, businesses increase
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Gr 10 Chapter 3 = Business cycles - memo

investment in their enterprises. They do this in various ways

• Buildings: New businesses may buy, build or rent new buildings. Businesses may
also add new branches in other areas √√
• Machinery: New and existing businesses buy more machines and equipment in
order to produce larger quantities of goods and services √√
• Inventories: During prosperity there is an increase in inventories (stock) to satisfy
increased demand √√
• Employment: The increase in demand for goods creates an increase in the
demand for labour to produce the goods. More workers are employed. People who
were unemployed before may now get jobs √√
• Prosperity ends when the cycle reaches its peak √√ (Max. 8 marks)

Recession
• Economic growth decreases which can be referred to as a negative economic
growth rate √√
• Businesses become pessimistic and reduce output √√
• A decrease in the employment rate as some workers are laid off which result in a
reduction in income √√
• Consumption: People have less money in their pockets. As a result, they consume
less. Therefore, aggregate demand decreases √√
• Real GDP: The quantity of goods and services produced decreases because of
the fall in demand. As output decreases, so does real GDP. Economic growth
decreases. √√
• Investment: Businesses reduce investment. Less money is spent buying capital
goods. √√
• A recession ends with the trough √√ (Max. 6 marks)

Depression
• If a recession continues for a long time, it becomes a depression √√
• Depression is a severe form of recession √√
• During a depression there is large-scale unemployment and severe shortage of
goods and services √√
• Depressions are rare because governments take steps to prevent recessions from
becoming depressions √√ (Max. 6 marks)

Recovery
• The economy starts to grow again √√
• Recovery usually starts slowly and speeds up over time √√
• There is a gradual increase in demand and an increase in output, which will
eventually change to prosperity √√ (Max. 6 marks)
(26)
ADDITIONAL PART
How can injections contribute towards the economic upswing?
• Improvement in the standard of living of people in the economy √√
• Both exports and investments will lead to more money flowing into SA √√
• More production in SA will benefit the SA economy √√
• More jobs are created √√
• Improvement in the infrastructural development √√
(Accept any relevant response) (10)

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Gr 10 Chapter 3 = Business cycles - memo

CONCLUSION
Business cycles are long term trends and can last from 3 to 5 years or even
10 years √√
(Any other relevant conclusion) (2)
[40]

43