Business Cycle Overview
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Questions and Answers

According to innovation theory, what is considered a fundamental cause of the business cycle?

  • Foreign investment
  • Low consumer demand
  • Innovation (correct)
  • Excessive savings

    • Underconsumptionists believe that high savings can lead to economic growth.

    False

    What happens if the Central Bank slows the growth of the money supply in the face of inflation?

    Recession will ensue.

    Investment is stimulated as foreign credit is __________.

    <p>reestablished</p> Signup and view all the answers

    Match the following concepts with their related definitions:

    <p>Underconsumption = Savings not invested leading to decreased demand Monetary theory = Controlling money supply to manage inflation Innovation theory = Enhancement of production leading to new products Aggressive investment = Plans to maintain demand for goods</p> Signup and view all the answers

    What is characterized by a decline in total output, income, and employment?

    <p>Trough/Depression</p> Signup and view all the answers

    What do underconsumptionists excessively consider in their theories?

    <p>Role of savings</p> Signup and view all the answers

    Aggressive investment plans can support the sustainability of demand for goods.

    <p>True</p> Signup and view all the answers

    The business cycle refers to fluctuations in economic activities that affect only a single industry.

    <p>False</p> Signup and view all the answers

    What is innovation defined as in the context of economic theory?

    <p>Enhancement of an existing production system.</p> Signup and view all the answers

    What phase of the business cycle is referred to when economic activity is at its lowest?

    <p>Trough/Depression</p> Signup and view all the answers

    In the expansion phase, income, output, trade, interest rates, wage, and employment are __________.

    <p>rising</p> Signup and view all the answers

    Match the phases of the business cycle with their characteristics:

    <p>Expansion = Recovery in economy with rising indicators Peak = High employment and economic activity Recession = Decline in total output and employment Trough = Economic activity at its lowest</p> Signup and view all the answers

    Which statement best describes the Philippine economy in comparison to other countries?

    <p>It experiences short periods of average economic growth with extended contractions.</p> Signup and view all the answers

    Unemployment is typically low during the expansion phase of the business cycle.

    <p>True</p> Signup and view all the answers

    How many notable economic cycles were identified starting from the beginning of 1997 in the text?

    <p>Three</p> Signup and view all the answers

    What is headline inflation primarily concerned with?

    <p>Change in the weighted overall average prices of all goods and services</p> Signup and view all the answers

    Core inflation includes prices that have transitory effects.

    <p>False</p> Signup and view all the answers

    What primary strategy do politicians use to stay in power according to the content?

    <p>keeping the price of rice low</p> Signup and view all the answers

    When prices rise, producers are incentivized to produce more, while buyers suffer and will need more money in __________ terms.

    <p>nominal</p> Signup and view all the answers

    Match the following commodities to their CPI weights:

    <p>Rice = 9.4 percent Corn = 0.9 percent Fruit and Vegetables = 5.3 percent LPG = 1.3 percent Kerosene = 0.3 percent Oil, Gasoline, and Diesel = 1.3 percent</p> Signup and view all the answers

    Which type of inflation does the Bangko Central ng Pilipinas monitor?

    <p>Headline inflation</p> Signup and view all the answers

    Inflation always means that the prices of all commodities are increasing.

    <p>False</p> Signup and view all the answers

    What percentage of the CPI do the excluded items account for?

    <p>18.4 percent</p> Signup and view all the answers

    What is the main function of foreign exchange?

    <p>To transfer purchasing power between countries</p> Signup and view all the answers

    A depreciation of the peso makes servicing foreign debt less costly.

    <p>False</p> Signup and view all the answers

    What can affect the competitiveness of Philippine exports?

    <p>Exchange rate movements</p> Signup and view all the answers

    The _____ exchange rate policy of the Philippines was adopted in 1970 to allow market forces to determine the value of the peso.

    <p>freely floating</p> Signup and view all the answers

    What happens to the price competitiveness of Philippine exports with peso appreciation?

    <p>It decreases</p> Signup and view all the answers

    Match the following terms with their correct meanings:

    <p>Appreciation = Increase in the value of the peso Pegged exchange rate = Fixed exchange rate that is adjusted periodically Freely floating system = Market-driven currency value Foreign debt servicing = Payments on loans in foreign currency</p> Signup and view all the answers

    The Bangko Sentral ng Pilipinas (BSP) sets the exchange rate for the peso.

    <p>False</p> Signup and view all the answers

    What system does the BSP follow for adjusting the pegged exchange rate?

    <p>Crawling peg system</p> Signup and view all the answers

    The BSP will adjust the currency in the adjustable peg system to correct a ______ or a ______.

    <p>surplus, shortage</p> Signup and view all the answers

    The dirty float system allows the BSP to maintain a fixed exchange rate at all times.

    <p>False</p> Signup and view all the answers

    What is the term used for the BSP's intervention to ensure liquidity in the foreign exchange market?

    <p>provide liquidity</p> Signup and view all the answers

    What is the primary purpose of the BSP's participation in the foreign exchange market?

    <p>To achieve a desirable exchange rate</p> Signup and view all the answers

    Under which system does the BSP intervene to smooth out short-run fluctuations in the exchange rate?

    <p>The managed float system</p> Signup and view all the answers

    Match the following types of exchange rate systems with their characteristics:

    <p>Managed float = BSP intervenes to smooth short-run fluctuations Dirty float = Allows currency to fluctuate within a range Adjustable peg = Sets maximum and minimum values for the currency Fixed exchange rate = Holds exchange rate steady against another currency</p> Signup and view all the answers

    The floating rate system enables the BSP to maintain long-term control over the exchange rate.

    <p>False</p> Signup and view all the answers

    What is an effect of excessive movements in the foreign exchange market that the BSP aims to address?

    <p>Maintain order and stability</p> Signup and view all the answers

    Study Notes

    What is the Business Cycle?

    • It is the fluctuation of economic activity in a country over a period of time.
    • There are four phases of a business cycle:
      • Peak: The highest level of activity in the economy, characterized by low unemployment and high production.
      • Recession: Economic activity declines for two or more consecutive quarters, marked by rising unemployment and falling production.
      • Trough: The lowest point of activity in the economy, with high unemployment and low production.
      • Expansion: Economic activity increases, leading to job growth and growing production.

    Causes of Business Cycles

    • Investment Theory: The theory states that increased investment leads to economic growth, but a decline in investment leads to recession.
    • Innovation Theory: Economic cycles are caused by innovation, which leads to increased production and profits but eventually saturates demand.
    • Monetary Theory: Changes in the money supply affect economic growth, with a decrease in the money supply leading to recession.

    Inflation

    • Headline Inflation: Calculated as the average change in the prices of all goods and services in a consumer price index (CPI) basket.
    • Core Inflation: Reflects the change in the CPI basket, excluding items with transitory effects on prices.

    Foreign Exchange Rate

    • The exchange rate is the price of one unit of foreign currency expressed in terms of the domestic currency.
    • Floating Exchange Rate: Determined by market forces of supply and demand, with minimal intervention by the central bank.
      • Managed Float: The central bank intervenes to moderate short-term fluctuations but does not affect long-term trends.
      • Dirty Float: The central bank intentionally manipulates the exchange rate to benefit exports.
    • Fixed Exchange Rate: The central bank sets a fixed exchange rate and intervenes to maintain it.
      • Adjustable Peg System: The central bank establishes a range for the exchange rate and adjusts it based on economic indicators.
      • Crawling Peg System: The central bank adjusts the exchange rate regularly based on economic indicators.

    Effects of Exchange Rate

    • International Trade: Changes in exchange rates affect the competitiveness of imports and exports.
    • Debt Servicing: Exchange rate fluctuations impact the cost of servicing foreign debt.
    • Purchasing Power: Depreciation of the currency increases the cost of imported goods and services.

    Determination of Exchange Rate

    Supply and Demand

    • Equilibrium exchange rate is determined by supply and demand for foreign currency, influenced by factors like trade and investment.
    • Central Bank Intervention: The central bank can intervene in the market by buying or selling foreign currency to control the exchange rate.

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    Chapter 12-13: Business Cycle, Unemployment, and Inflation PDF

    Description

    This quiz covers the concept of the business cycle, detailing its four main phases: peak, recession, trough, and expansion. Additionally, it explores the causes of business cycles, including investment, innovation, and monetary theories. Test your understanding of these economic principles.

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