Grade 12 Economics Business Cycles Self Study Guide PDF

SENIOR CERTIFICATE ECONOMICS Grade 12 SELF STUDY GUIDE BOOKLET 2 Topic BUSINESS CYCLES 1  TABLE OF CONTENTS PAGE...

SENIOR CERTIFICATE ECONOMICS Grade 12 SELF STUDY GUIDE BOOKLET 2 Topic BUSINESS CYCLES 1  TABLE OF CONTENTS PAGE 1. Introduction 3 2. How to use this self-study guide 4 3. Topic: Business Cycle 5 3.1.1 Notes/Summaries/Key concepts 5 3.1.2 Worked Example (ECON) 6 - 11 3.1.3 Questions 12- 29 3.2 Answers 30 - 42 3.3 Examination guidance (Topic specific) 4. Study and Examination Tips (Subject Specific) 43 - 48 5. References & Acknowledgements 49 2 INTRODUCTION The declaration of COVID-19 as a global pandemic by the World Health Organisation led to the disruption of effective teaching and learning in many schools in South Africa. The majority of learners in various grades spent less time in class due to the phased-in approach and rotational/ alternate attendance system that was implemented by various provinces. Consequently, the majority of schools were not able to complete all the relevant content designed for specific grades in accordance with the Curriculum and Assessment Policy Statements in most subjects. As part of mitigating against the impact of COVID-19 on the current Grade 12, the Department of Basic Education (DBE) worked in collaboration with subject specialists from various Provincial Education Departments (PEDs) developed this Self-Study Guide. The Study Guide covers those topics, skills and concepts that are located in Grade 12, that are critical to lay the foundation for Grade 12. The main aim is to close the pre-existing content gaps in order to strengthen the mastery of subject knowledge in Grade 12. More importantly, the Study Guide will engender the attitudes in the learners to learning independently while mastering the core cross-cutting concepts. 3 HOW TO USE THIS SELF STUDY GUIDE? 2.1 This Study Guide addresses content and offers strategies to understand the differen aspects of assessing Business Cycles in a step-by-step approach, with consolidation activities to conclude. 2.2 The explanations and activities are intended to supplement the work you may have covered in class or have gained from textbooks, and it does not replace them. 2.3 Activities proceed from the low-order, simple focused examples to middle-order with paragraph and graphical construction and interpretation and finally higher-order questions that require application of knowledge that may relate to current issues. 2.4 It is important to allocate sufficient time to: Carefully read the explanations provided; underline or highlight key concepts, difficult vocabulary, important data, and relevant data. Underline key concepts within the question and ensure that correct interpretation is done before attempting the question. Practice the skill of drawing graphs dealt with in the Business Cycles. 2.5 Attempt the activities on your own; make constant reference to the explanatory notes but avoid referring to the suggested answers before attempting to answer an activity. 2.6 Compare your answers to the suggested answers and do your corrections in a different colour-ink pen. Note that you will learn more by discovering your weaknesses (when you get things wrong) and trying to understand why your thinking was out of line with what was expected. 2.7 The activities provided may not be sufficient to perfect your skills. Always refer to similar questions from past examination papers for this purpose. Repetitive practice is always valuable. 4 MACRO ECONOMICS BUSINESS CYCLES Outcome Analysis and explanation of business cycles, and how they are used in forecasting. Know the types of business cycles and what happens in the economy over a few years. Understanding the different phases of a business cycle can help individuals make lifestyle decisions, investors make financial decisions and government make appropriate policy decisions. The composition and features of business cycles Key concepts Term Description Successive periods of increasing and decreasing economic activity / a time series showing repeated increasing and decreasing economic activity/ the recurrent (not Business Cycle periodic) pattern of expansion and contraction in the level of economic activity. Business cycle refers to the changes in the economy that produces a cyclical pattern that repeats itself every three to five years. It is also known as the economic cycle. When GDP begins to increase following a contraction and a trough in the business Recovery cycle; an economy is considered in recovery until real GDP returns to its long-run potential level. Increased output and excessive economic activities following the recovery / economic Prosperity growth rate on a year - to -year basis is positive, at an increasing rate. Expansion A period between the trough and peak including both recovery and prosperity. A negative economic growth for at least two successive quarters/ a decline in economic Recession activity lasting more than a few months. Depression Continuous decrease in the production output and economic activities. Contraction A period between the peak and trough including both recession and depression. The highest point between the end of an economic expansion (end of prosperity) and Peak the start of a contraction (start of recession). The period immediately before and through the upper turning point is known as the Boom boom. The lowest point between the end of an economic contraction (end of depression) and Trough the start of a expansion (start of recovery). Real business An actual business cycle is obtained when the effects of irregular events, seasons and cycle long-term growth trend are removed from the time series data. 5  How to draw a business cycle diagram https://youtu.be/TXrOpjG4dUs Remember to show a complete cycle with your wave – like pattern (2 periods and 2 turning points Step 1 Drawing of the axes - a vertical line that represents the economic activities and a horizontal line that represent the time Step 2 Trend line - draw a line from the left point to the right of the graph Trend Step 3 Draw the ‘wave – like’ pattern around the trend line – illustrating the four phases and the turning points See diagram below: index of economic activities Time/ Period 6 Characteristics of the phases, points and periods of a business cycle Recovery phase Recovery phase is an improvement in economic activity that occurs immediately after a trough. An increase in production output occurs. Unemployment decreases as consumers gain confidence in economic growth. The increased employment leads to rise in income. An economy is considered in recovery until real GDP returns to its long-run potential level. Prosperity phase Businesses and consumers have gained confidence in the economy. A sustained increase in the production process is evident. Employment levels are at highest, wages and salaries rise and spending increases. The demand for goods and services rises. The high demand of goods and services will cause a rise in the inflation rate. Recession phase A negative economic growth for at least two successive quarters occurs immediately after the peak. The high prices hike of goods and services discourage consumer demand. Production output will decline due to high interest rate. The demand for credit due to increased interest rates will fall. Unemployment rate will rise due to retrenchment. There is a decline in the economic activity and growth. Depression phase Continuous decrease in the production output and economic activity leading to a shutdown of most economic activities. There is negative impact on investment spending. It occurs when a sustained decline in economic growth is evident. Unemployment rate is extremely high. Most businesses become bankrupt and down scale or close. A drastic decline in luxury consumer goods and services. 7 The Boom The period immediately before and through the upper turning point is known as the boom. Two turning points of business cycle Peak Is the highest turning point of the business cycle. Production of goods and services are at the highest output level. Employment is also at a maximum level. The high demand of goods and services cause a price hike. An increase in inflation occurs because of increasing prices. Trough This is lowest point of the business cycle at the end of the contraction period. Income levels are at the lowest due to high job losses. Low levels of investments by firms. Households use most of their savings to provide necessities. Periods of business cycle The expansion periods A period that consists of the recovery and prosperity phases (expansion = recovery + prosperity). It is the upswing in economic activities from trough to peak. Expansion is an upward sustained growth in the economic activities that lead to the increase in the gross domestic product (GDP). During this period, the economy experiences sustained growth. The contraction periods A period that consists of both the recession and the depression phases (contraction = recession + depression). It is a downswing from peak to trough. It shows a rapid decrease in the production activities in the economy. There is a decline in employment and decrease in the gross domestic product (GDP). 8 Summary of the South African business cycle context THE DYNAMICS OF THE SOUTH AFRICAN BUSINESS CYCLE Phases Stage of the business cycle Phases Stage of the business cycle Latter stages of the downswing Latter stages of the upswing Business sentiment is High utilisation of production depressed capacity Low demand for credit Higher demand and prices for Interest rates are low capital goods Surplus on the current Inflation increases Depression account of the balance of Prosperity Deficit on the current account payments of the balance of payments Property market is Share prices lose momentum depressed High demand for credit Share prices start Property prices rise increasing Interest rates increase Eventually a trough is Eventually a peak is reached reached Exports increase (e.g. because Trigger or of increased overseas demand activate or an increase in the gold price) Phase Early stages of an upswing Phase Early stages of a downswing Rand depreciates Exports grow Inflation increases Manufacturing production Interest rates increase increases Property prices are still high Inventories decrease Unplanned increase in Recovery Interest rates fall further Recession inventories Rand depreciates Manufacturing production falls Inflation decreases rapidly Current account is still in a Surplus on the current account surplus of the balance of payments Demand for credit starts falling Source: Mohr & Fourie (2011:537). 9 Real / actual business cycle An actual business cycle is obtained when the effects of irregular events (such as the COVID-19 pandemic), seasons and long-term growth trend are removed from the time series data. Real business cycles have periods of increasing and decreasing economic activity within business cycles (as you go up, there are some elements of going down). This means there are cycles within cycles. It is not a smooth rise or decline. These periodic fluctuations are not shown in the typical business cycle graph discussed earlier because the curve has been smoothened. The graph below shows South Africa’s recent real business cycle Figure 1.2.5: South Africa’s Real Business Cycle KNOWLEDGE EMPOWERS YOU 10 Adapted from SARB QB December 2020 11 ACTIVITY 1 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 numbers (1.1.1 to 1.1.2) in the ANSWER BOOK, e.g., 1.1.9 D 1.1.1 A period when there is a general increase in economic activities is known as a(n)… A. downswing B. upswing C. depression D. recession 1.1.2 The point where economic contraction is at its lowest is called a … A. trough B. peak C. length D. trend 1.1.3 Employment figures in the business cycle will increase during a … A. recession B. recovery C. depression D. trough 1.1.4 During an economic recession … will increase A. employment B. production C. spending D. unemployment (4x2) (8) 12 1.2 Study the diagram below and answer questions that follow. 1.2.1 Identify the letter that represent the trend line in the illustration above. (1) 1.2.2 Which letter represents a trough in the diagram above? (1) 1.2.3 Briefly describe the term business cycle. (2) 1.2.4 Explain economic activity during phase EF in the business cycle. (2) 1.2.5 How can the length of business cycles be used in forecasting? (4) (10) Explanations/causes of business cycles Key concepts Concepts Description Exogenous Factors outside the market system of demand and supply that lead to the factors occurrence of business cycles. Endogenous Factors originating within the market system that lead to the occurrence of factors business cycles. A school of thought which believes that controlling the supply of money Monetarist directly influences inflation and that by fighting inflation with the supply of money, they can influence interest rates in the future. approach Monetarist economics theory was formulated by Milton Friedman. Monetarist economics involves the control of money in the economy. A school of thought which believes the economy is best controlled by manipulating the demand for goods and services. Keynesian Keynesian economics theory was formulated by John Maynard Keynes approach The terminology of demand-side economics is synonymous with Keynesian economics. 13 Two explanations/ causes of a Business Cycle are discussed and compared. Exogenous / Monetarist explanations Endogenous/Keynesian explanations Originate from outside the free market system/ Originate from within the market system/ economy. economy. External forces cause expansions and Forces within the market system cause contractions. expansions and contractions. Examples of external forces; natural disasters, Examples of internal (forces within): technological innovations, government shortcomings in how markets operate intervention, random shocks like COVID-19 (different markets not working together), price global pandemic, wars and fuel price mechanism failing to bring together demand increases, changes in money supply, changes and supply, prices which are difficult to bring in the contribution of sectors to the economy down. (structural changes). Believe that markets are inherently (naturally) Believe that markets are inherently unstable. stable. A B Refer to the graph above: Refer to the graph above: The potential growth path is indicated by the The straight bold line (AB) indicates the natural straight thin black line. The cyclical bold line growth of the economy which is inherently around the thin black line indicates the real stable. path of the economy which is unstable. The fluctuations around it are a result of external forces. Believe that the government should Believe that the government should not intervene (by using government policies) to intervene in how markets operate. smooth out the business cycles. 14  Types of business cycles Business cycles are different from each other. The differences can be seen in aspects like the time frames, length and amplitude (see discussion on features underpinning forecasting) Four types of business cycles are explained below: 1. Kitchin Cycle · Last from 3 -5 years · Occur as businesses adapt their inventory levels · Shortest business cycle 4. Kondratieff Cycles 2. Jugler cycle · Last 50 years and longer · Last 7 – 11 years · Caused by technological · Caused by large innovation, wars, construction investments of businesses of new roads and discoveries and government. of new deposits, e.g gold 3. Kuznets cycles · Last 15 - 25 years · Caused by changes in the building and construction industries. · Also called building cycles 15 Activity 2 2.1 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A–E) next to the question numbers (2.1.1 to 2.1.4) in the ANSWER BOOK COLUMN A COLUMN B 2.1.1 Jugler A Last 50 years and longer 2.1.2 Kondratieff B Also called kinetics 2.1.3 Kitchin C Last 15 -25 years 2.1.4 Kuznets D Shortest cycle Caused by large investments of businesses and E government (4X1) (4) 2.2 Name any Two types of Business Cycles (2) 2.3 Explain the Monetarist explanations in business cycles (8) 2.2 Explain the exogenous causes of business cycles (8) Government policy Key concepts Concept Description The policy of the central bank regarding the money supply and interest Monetary policy rate of a country to influence economic activity. Expansionary Helps speed up the economy/ increase economic growth by cutting monetary policy interest rates. Contractionary Helps to slow down a growing economy by increasing money supply in monetary policy the economy. Repurchase rate Interest rate that the Reserve Bank charges financial banks. (repo rate) The interest rate that commercial banks charge their most creditworthy Prime lending rate customers, generally large corporations. It is linked to the repo rate. The policy of how the government’s budget is used to raise Fiscal policy money(taxation) and spend money(expenditure) to influence economic activity. Expansionary fiscal Increasing government spending and decreasing taxes to stimulate the policy economy. Contractionary Decreasing government expenditure and increasing taxes to slow down monetary policy a growing economy. Compulsory payments made to the government by businesses and Taxes households. 16  Government Includes all government consumption, investment, and transfer expenditure payments. The sustained increase in the general price level of goods and services Inflation in the economy. An increase in the productive capacity of a country. Economic growth An increase in the goods and services produced in a country. Government applies policies to ensure the economy is more stable. The primary aim of government policies with business cycles is to achieve the best possible growth rates. Monetary and fiscal policies are the main government policies used to achieve possible growth rates. Monetary policy Monetary policy refers to the actions undertaken by Reserve Bank to control money supply and achieve sustainable economic growth. The Reserve Bank regulates the supply of money by influencing its costs. The governor of the Reserve Bank implements the monetary policy. Five instruments are used. Instruments used by the Reserve Bank Interest rates Interest rates are based on the repurchase rate. The Reserve bank will cut/decrease the interest rate during a recession or depression. This is referred to as expansionary monetary policy. This helps to stimulate the economy by making it less expensive to borrow while increasing the money supply. If the economy is growing too rapidly during prosperity, the Reserve bank can implement a contractionary monetary policy. Higher interest rates are charged causing people to have less money to spend. Expenditure and demand will decrease, and the economy will be dampened. 17 Open market transaction Involves buying and selling of government securities and other certain securities in the open market by SARB. Purchases inject money in the banking system increasing the amount of money available for credit. When the SARB wants to limit the supply of money in circulation, it sells securities to the banks. Cash Reserve Requirements The SARB sets a minimum amount of reserve funds that commercial banks must keep as cash. These may be lowered or raised to control money supply and availability of credit. Lowering reserve requirements allows more bank lending during prosperity to dampen the economy. The SARB will raise the reserve requirement percentage when they want to limit the amount of money in circulation – during recession to stimulate the economy. Moral persuasion/ suasion SARB convinces commercial banks to be more careful when lending money to their clients. Banks are persuaded to lend less during prosperity and more in times of recession. Fiscal policy Fiscal policy is the use of government revenue collection and expenditure to influence a country’s economy to grow. This involves decisions by the state relating to taxation and government spending to achieve full employment, economic growth, price stability and economic equity. The Minister of Finance implements the fiscal policy. The government’s budget summarises the fiscal policy. The government adjusts the taxes and its expenditure to influence the demand and supply of goods and services. An expansionary fiscal policy will be implemented when the economy is in a recession to stimulate it. An increase in government expenditure serves as an injection into the economy. Aggregate demand will increase as production increases. Taxes can be reduced, which will lead to an increase in disposable income and eventually an increase in aggregate demand. 18  A contractionary/restrictive fiscal policy will be implemented when the economy grows too fast to curb the growing economic activity. A decrease in government expenditure will decrease aggregate demand. Taxes can be increased which will decrease disposable income. The new economic paradigm Key concepts Concepts Description A basic principle that describes how an economy works or should work. Economic A paradigm is a perspective or set of ideas. paradigm It is a way of viewing a condition e.g., the economy New economic Refers to government policies designed to ensure a high rate of economic paradigm growth without having supply limitations and price inflation. Occurs when a person who is actively searching for employment is unable Unemployment to find work. Is often used as a measure of the wealth of the economy. Phillips Curve Illustrates the relationship between unemployment and inflation Demand-side Attempts to increase or decrease aggregate demand to affect output, policies employment, and inflation. Supply-side Policies aimed at increasing aggregate supply (AS). policies Aggregate It is the total spending on goods and services in the economy. demand (AD) AD = C+I+G+(X-M) Aggregate Supply (AS) is the total quantity of goods and services supplied Aggregate supply at every price level. (AS) It is the total value of goods and services produced in the economy in a given period. 19 Government can use monetary and fiscal policies to smooth out the business cycle The new economic paradigm Theories that explain the causes of business cycles are only true under specific circumstances. Governments need to apply policies that will prevent peaks ending with inflation or troughs that end with unemployment. The new economic paradigm in terms of the smoothing of business cycles encourages achieving stability through sound, long term decisions relating to demand and supply in the economy. The new economic paradigm refers to government policies designed to ensure a high rate of economic growth without having supply limitations and price inflation. This new way of thinking (new economic paradigm) lies in demand – side and supply side policies. Demand-side policies Monetary and fiscal policies focus on aggregate demand. Demand side policy is relying on aggregate demand only. The aggregate demand is created by households, businesses, and the government (C + G + I). Demand side policy does not render ideal results on its own i.e. sustained growth without supply limitations and price inflation. Growth is often cut short because of all sorts of bottle necks that develop in the economy. Examples of bottlenecks such as, inflation, balance of payment deficits, and shortages of skilled labour, etc. Figure 1 shows what happens when only focusing on the demand side policies which rely on aggregate demand 20  0 Figure 1: Demand- side policy without an increase in supply When demand increase (from D1 – D2) the quantity increases from Q1 to Q2. The quantity increase is a desired result, but supply did not increase Supply is often said to be ‘sticky’ (fixed) in the short-term) The shifting of demand from D1 to D2 resulted in a price increase from P1 to P2. This leads to inflation – an undesired result. It is clear that Aggregate Supply also needed to be managed. If the cost of increasing production is flexible; a greater real production output can be supplied at any given price level. 21 Figure 2: effect of demand-side and supply-side policies At Point C, Aggregate Demand (AD) and Aggregate Supply (AS) are in equilibrium. When Aggregate Demand (AD) increases in the economy, it shifts the Demand curve (AD) to the right (AD1). If the Aggregate Supply curve responds promptly and increase, the Aggregate Supply (AS) shifts to the right to AS1. At Point E the new equilibrium is formed At point E, a larger production output becomes available (Q – Q1), without any price increases. This occurs over the long-term – because aggregate Supply adjust easier over long-term. Over the short-term, when Aggregate Demand (AD) increase, it shifts to the right (AD1) and when Aggregate Supply (AS) remains unchanged, the AD1 intersect the AS at point F. At Point F a new equilibrium is formed. At Point F real production increase but the price also increases. Inflation occurs. To solve this problem, a situation must be created where supply is more flexible. Unemployment Demand-side policies are effective in stimulating economic growth. The demand for labour will increase due to economic growth, and that leads to reduced unemployment. A decrease in unemployment results in an increase in inflation because more people are employed, which causes an increase in demand for labour. This relationship between unemployment and inflation can be illustrated by the Phillips curve. 22  Phillips graph Figure 3: Phillips’s curve The Phillips curve shows the inverse relationship between rates of unemployment and corresponding rates of inflation in an economy. Stated simply, as unemployment decreases in an economy, inflation increases. The PC curve shows the initial situation. A is the point of intersection of the PC curve with the x-axis. It shows the natural rate of unemployment, which is 14% in the graph above. This is the rate of unemployment that causes no pressure on wages and has no inflationary effects – inflation is at 0%. A movement left from Point A to Point B (if the economy is stimulated) will cause a decrease in unemployment (increase in employment) and an increase in inflation (unemployment decreases from 14% to 10% and inflation increases from 0% to 2%). If economic growth occurs and it causes a decrease in unemployment to 10%, it means the more people will get a job. If unemployment falls to C for instance, 8%, inflation caused by wage increases is at 6%. If unemployment increases from C to B to A, inflation falls from 6% to 2% to 0%. There is an inverse relationship between unemployment and inflation. The government decides the amount of unemployment they will accept for less inflation. Supply side measures can be used to shift the PC curve to PC1. Improved education Effective training Fewer restrictions on migration of skilled labour If the PC curve shifts to the left (PC1), the natural level of unemployment will decrease from 14% to 9%. The supply measures help reduce unemployment (from14%-9%) while keeping inflation low at 0%. 23 Activity 3 3.1 Study the graph below and answer the questions that follow. Source google.com 3.1.1 Provide a name for the graph given above. (1) 3.1.2 What is the original natural rate of unemployment in the graph above? (1) 3.1.3 Briefly describe the term new economic paradigm (2) 3.1.4 Explain how the government can use its fiscal policy to speed up the recovery of an economy (2) 3.1.5 Redraw the graph to show the impact of supply side policies in the economy (4) 3.2.1 Write the acronym SARB in full. (1) 3.2.2 What type of monetary policy should SARB implement to prevent a trough in the business cycle? (1) 3.2.3 Briefly describe the term recovery (2) 3.2.4 Explain the negative impact of COVID-19 in the manufacturing sector. (2) 3.2.5 How can the SARB prevent further recessions in the economy? (2X2) (4) 3.3 With the aid of a graph, explain the effect of demand-side and supply-side policies in smoothing out business cycles. (8) Supply-side policies The supply-side policies focus on aggregate supply of the producers. For example, when the cost of production is reduced, producers can supply more goods & services. Reduction of production costs by providing subsidies to businesses. Cash incentives such as decrease tax to produce certain goods and services. Infrastructural services – the government can supply infrastructure services such as transport, communication, and energy. Administrative costs – government can reduce administrative costs such as inspections and unnecessary regulations. Improving the efficiency of inputs Capital consumption - more production capacity through decreased taxes. 24  Human resources development - better trained staff (SETAS). Free advisory services - technical advice from expensive expert sources. Improving the efficiency of markets. Deregulation – no government intervention by the removal of rules and regulations. Competition – create a competitive environment by developing new enterprises (SMMEs). Private state-owned enterprises (SOEs) to increase competition. Features underpinning forecasting about business cycle Concepts Description Leading Indicators that change before the economy changes indicators e.g., Job advertising space, commodity prices, manufacturing orders Co-incident Indicators that change at the same time as the economy indicators e.g., value of wholesale, retail and new vehicle sales, volume of imports Indicators that change only after the economy has changed. Lagging e.g., unemployment rate, number of commercial vehicles sold, real investment indicators in machinery and equipment Composite It is a grouping of various indicators of the same type into a single value. indicators e.g., gender equity Economic indicator that showing the general direction in which the economy Trend is moving The length of the business cycle is measured from peak to peak or trough to Length trough. Amplitude Measures the distance of the variable from the trend line A technique used to predict/estimate the unknown from the known facts or Extrapolation experiences Moving Is a method of repeatedly calculating a series of different average values averages along a time series to smooth out the business cycle Qualitative Forecasting based on intuitive judgement, own opinions, market research and methods subjective probability estimates Quantitative Forecasting based on mathematical models, statistics and historical time method series data Time series Frequency of data – daily, weekly, monthly, quarterly or annually Forecasting of business cycles Leading indicators The turning points of these variables tend to always lead the reference turning points. It gives a warning of what we can expect in the future, economists use them to forecast turning points in the economy. Examples: net gold & foreign reserves, volume of mining production, total number of new cars sold, share prices, number of new businesses registered and real exports. 25 Lagging indicators These variables tend to always lag with the reference turning points. They indicate what has already happened in the economy. Examples: the hours worked in construction, employment, the number of commercial vehicles sold and investment in capital goods (machinery & equipment). Coincident Indicators The turning points of these variables tend to always coincide with the reference turning points. They provide information about the current situation of the economy. Examples: the real GDP, registered unemployment, volume of imports and the volume of manufacturing production. Composite Indicators It is a grouping of various indicators of the same type into a single value. The single figure forms the norm for a country’s economic performance. Trend line It is the general direction of the economy. The trend line that rises gradually will be positively sloped in the long run. The rising line indicates a growing economy. Length The length is measured from peak to peak or trough to trough. Longer cycles show strength and shorter cycles show weakening regarding the economic activities. Amplitude Measures the distance of the variable from the trend line. Amplitude is the vertical (height) difference between a trough and the next peak in the cycle. A larger amplitude means more extreme changes that occur in cycle. 26 Extrapolation A technique used to predict/estimate the unknown from the known facts or experiences. Extrapolation is to estimate something unknown from facts that are known. The extrapolation from known facts is used to predict future share prices. Moving averages Moving averages are used to analyse the changes in a series of data over a certain period of time. 27 Activity 4 4.1 Study the graph below and answer the questions that follow. 4.1.1 Identify the point marked ‘C’ in the graph above. (1) 4.1.2 Which feature underpinning forecasting is represented by AC? (1) 4.1.3 Briefly describe the term business cycle. (2) 28 Activity 5 5.1 Briefly describe the term Extrapolation. (2) 5.2 Briefly describe the term amplitude. (2) 5.3 How accurate are leading indicators? (2) 5.4 Discuss the trend line in the forecasting of business cycles. (8) 5.5 Briefly discuss lagging indicators as a feature underpinning forecasting. (4 x 2)(8) 5.6 Distinguish between the amplitude and trend line as features underpinning forecasting (4 x 2)(8) 29 1.1 1.1.1 B PPUpswing 1.1.2 A PP Trough 1.1.3 B PPRecovery 1.1.4 D PP Unemployment 1.2 1.2.1 Identify the letter that represent the trend line in the illustration above. (1) KP 1.2.2 Which letter represents a trough in the diagram above? (1) DP 1.2.3 Briefly describe the term business cycle (2) Successive periods of increasing and decreasing economic activity / a time series showing repeated increasing and decreasing economic activity/ the recurrent (not periodic) pattern of expansion and contraction in the level of economic activity. PP (Accept any other relevant, correct response) 1.2.4 Explain economic activity during phase EF in the business cycle. (2) Economy is growing and improving rapidly.PP More businesses open up and employment increasePP Higher demand and higher prices for capital goodsPP Firms make higher profits and household salaries increasePP 1.2.5 How can the length of business cycles be used in forecasting? (4) The length is remains relatively stable and can be used to forecast the next cycle with similar lengthPP If a business cycle has 13 years, it can be predicted that 12 years will pass between successive peaks or trough, or it can take 6 years for an economy to pass through a trough PP Longer cycles show strength which will indicate that the next cycle will also be strongPP 30 2.4 Explain the Monetarist explanations in business cycles (8) Refer to those independent factors that can influence business cycles and originate outside the economyPP Some economists believe that business cycles are caused by exogenous factors such as those described below PP The monetarists believe markets are inherently stablePP Disequilibrium is caused by incorrect use of policies, e.g. monetary policy PP Governments should not intervene in the market PP Sunspot theory based on the belief that increased solar radiation causes changes in weather conditions PP Weather conditions, technological changes and shocks cause upswings and downswings PP (Accept any other correct relevant response) A maximum of 1 mark for examples 31 ACTIVITY 3 3.1 DATA RESPONSE 3.1.1 Provide a name for the graph given above. Phillips Curve P (1) 3.1.2 What is the original natural rate of unemployment in the graph above? 14% P (1) 3.1.3 Briefly describe the term new economic paradigm The new economic paradigm refers to government policies designed to ensure a high rate of economic growth without having supply constraints and price infation. PP (Accept any other correct relevant response) (2) 3.1.4 Explain how the government can use its fiscal policy to speed up the recovery of an economy Government can speed up the recovery of the economy by: reducing taxes Pwhich will give consumers and companies more money to spend on goods and services and for companies to expand theri production capacity.P increasing government spending P whiich will increase aggregate expenditure and demand and thus stimulate economic activity and employment. P increasing government spending and simultaneously decreasing taxes PP (Accept any other correct relevant response) (Any 1 x 2) (2) 3.1.5 Redraw the graph to show the impact of supply side policies in the economy (4) AS AD1 AD Price Level % AS 1 Labelling of axes = 1 AD moving to the right = 1 C F P AS moving to thr right = 1 Correct sloping of curves = 1 mark each Equillibrium point = 1 AS AD1 Max 4 Marks AD AS 1 Q Q Real Output 32 3.2.1 Write the acronym SARB in full. (1) South African Reserve BankP 3.2.2 What type of monetary policy should SARB implement to prevent a trough in the business cycle? Expansionary monetary policyP 3.2.3 Briefly describe the term recovery. (2) Sustained level of increase in economic activity which occurs after a troughPP (Accept any other correct relevant response) 3.2.4 Explain the negative impact of COVID-19 in the manufacturing sector. (2) COVID-19 led to a total shutdown of the economic activities PP (Accept any other correct relevant response) 3.2.5 How can the SARB prevent further recessions in the economy? (2x2 ) ( 4) The SARB can prevent the recessions by: Adjusting the repo rate downwards which will lead to lower interest ratesPP Decreasing cash reserve requirements to make more money available in the banks, for loansPP Buying securities in the open market (open market transactions) PP Stabilising the exchange rates to increase the money supplyPP 3.3 How can South Africa’s fiscal policy contribute to a higher economic growth rate? (8) Increasing government spending to encourage economic activity directly from the private sector. PP Transferring funds to individuals who may then spend that money to buy goods and services. PP Decreasing tax revenue to encourage economic activity which increases individuals’ disposable income. PP The disposable income will increase demand for consumer goods and services. PP The increase in demand for goods and services leads to decreased unemployment. PP The expansionary fiscal policy can be beneficial when the economy is in recession. PP 33 Activity 4 4.1.1 Identify the point marked ‘C’ in the graph above TroughP (1) 4.1.2 Which feature underpinning forecasting is represented by AC? LengthP (1) 4.1.3 Briefly describe the term business cycle Successive periods of increasing and decreasing economic activity / a time series showing repeated increasing and decreasing economic activity/ the recurrent (not periodic) pattern of expansion and contraction in the level of economic activityPP (2) 34 Activity 5 Briefly describe the term Extrapolation Extrapolation means to estimate something unknown from the facts and information that is known using past data, where predictions are made about the future based on assumptions related to trends.PP (2X1) (2) 5.2 Briefly describe the term amplitude It is the difference between the value of total output between peak and trough measured from the trend line to the peak and trough PP (2X1) (2) How accurate are leading indicators? (2) Leading indicators often face trade-offs between accuracy, precision and lead time in predicting future events PP Looking at several leading indicators in conjunction with other types of data can help provide information about the future health an economy. PP 1.1 Discuss the trend line in the forecasting of business cycles. It represents the average position of a cycle. PP Indicates the general direction in which the economy is moving. PP An upward trend suggest that the economy is growing. PP Trend line usually has a positive slope, because production capacity increases over time. PP (Accept any other relevant answer) (4x 2) (8) 5.5 Briefly discuss lagging indicators as a feature underpinning Forecasting (4 x 2) (8) Lagging follow immediately after the coincident indicators PP Serve to confirm the behaviour of the coincident indicators PP If it does not confirm the upswing or downswing, for instance, it signals that the upswing or downswing is weak. PP A weak downswing will most likely end at an early stage PP Change direction after reference turning points in the business cycle has been reachedPP Confirm changes that were first indicated by the leading indicators and then the coincident indicators PP Provide an advance signal of a turning point in the business cyclePP First to reflect imbalances that intensify (increase) or subsidise (decrease) in the economy PP Influence of movements on subsequent movements in the leading indicators help explain the view that one business cycle generates the next one. PP (4 x 2) (8) 35 5.6 Distinguish between the amplitude and trend line as features underpinning forecasting (4 x 2) (8) Amplitude The power of the underlying forces such as interest rates, exports, or consumer spending PP A large amplitude during upswing demonstrates strong underlying forces PP The duration of a cycle with a large amplitude is usually longer than one with a smaller amplitude PP The extent of change – the larger the amplitude the more extreme the changes that may occur PP During an upswing unemployment may decrease from 20% to 10% (a decrease of 50%) inflation may increase from 3% to 6% (by 100%) or a surplus on the current account (of the balance of payments) can change from surplus to a deficit PP Trend line: The trend line that rises gradually will be positively sloped in the long run, the rising line indicates a growing economyPP The trend indicates the general direction in which indexes that were used in the business cycle move PP The trend will change when the time series data change their behaviour patterns of the past PP Some forces have to be overcome for the time series data to change their behaviour patterns of the past, e.g. Resistance points and ChannelsPP (Accept any other relevant facts response) (Any 2 x 4) (8) 36 Activity 6 Discuss in the new economic paradigm in detail. (26 marks) Evaluate the use of tax cuts as a means to stimulate the economy. (10 marks) INTRODUCTION The “new economic paradigm” discourages policy makers from using monetary and fiscal policies to fine-tune the economy, but rather encourages achieving stability through sound long-term policy decisions relating to demand and supply in an economy.PP (Accept any other relevant introduction) (Max 2) MAIN PART DEMAND-SIDE POLICIES Demand-side policies refers to measures undertaken by the government to influence the aggregate demand in the economy. PP The government uses monetary and fiscal policy to achieve this goal. PP When households, firms and government spend more, aggregate demand in the economy increases. PP This makes the economy grow but can lead to inflation. PP Inflation P Aggregate demand increases more quickly than aggregate supply and this causes prices to increase. PP When the supply does not react to the increase in demand, prices will increase. PP This will lead to inflation (a sustained and considerable increase in the general price level). PP Unemployment P Demand-side policies are effective in stimulating economic growth. PP Economic growth can lead to an increase in the demand for labour. PP More people will be employed, and unemployment will decrease. PP When unemployment decreases inflation is likely to increase. PP SUPPLY-SIDE POLICIES Supply-side policies refer to any measures undertaken by government to influence the level of aggregate supply in the economy. PP Government might try to stimulate aggregate supply by reducing the cost of production or improving the efficiency of inputs. PP Reduction of costs of production P Reducing the cost of production means that a greater output can be supplied at any given price level. PP Governments can roll out measures that can reduce the cost of production of businesses directly or indirectly. PP 37  E.g. provision of infrastructural services, efficient administration, less red tape and no corruption. PP Infrastructural services P – transport, communication, water, and energy costs often result in substantial costs to businesses. PP Government can make a significant contribution if charges are reasonable, and services are efficient seen that all these services are under government control in South Africa. PP Administrative costs P – inspections, reports on the application of various laws, regulations and by-laws, tax returns etc. adds to production costs. PP Decrease administrative costs (red tape) can make businesses more efficient. PP Cash incentives P – subsidies for businesses to locate in neglected areas where unemployment is high PP and compensation to exporters for certain costs they incur in the development of export markets. PP Improving the efficiency of inputs P Greater efficiency is usually achieved with incentive schemes and measures such as: Tax rates – high rates of personal income tax are a disincentive to work. PP High rates of corporate income tax are a disincentive to invest because they increase costs and reduce net profits. PP High indirect taxes such as VAT are a disincentive to produce because they increase selling prices. PP Capital consumption P – replacing capital goods regularly creates opportunities for businesses to keep up with technological development. PP Depreciation allowances are subtracted from gross profit before taxes are calculated and therefore reduce the amount of tax liability. PP Human resource development P – the quality of labour can be improved by improving health care, education, training or the mobility of labour. PP Free advisory services P – these promotes opportunities to export and establish businesses in foreign countries; improve the quality of human resources through the skills development act. PP Improving the efficiency of markets P Measures that improve market efficiency include: Deregulation: P remove laws, regulations and other forms of government controls that interfere in markets and make the markets free. PP Address labour and other resource market inflexibilities. PP Remove price, import, and exchange controls. PP Competition P – Implement measures that can increase competition. PP encourage the establishment of new businesses. PP Invite foreign direct investments. PP Remove power imbalances, such as monopolies and opportunities for collusion (oligopolies). PP 38  Levelling the playing field P – private businesses cannot compete with public enterprises. PP Public enterprises have legislative protection and supported by government. PP Corruption needed to be dealt with vigorously. PP (Max 26) 39 ADDITIONAL PART Evaluate the use of tax cuts as a means to stimulate the economy. A tax cut is generally seen as a fiscal measure to stimulate the economy. The assumption is that tax cuts will increase the amount of money for spending and therefor will lead to an increase in aggregate demand. PP In an economy that is already weak, tax cuts will provide an immediate boost in demand, however tax cuts will create larger budget deficits. PP Over the long term, and in a healthy economy, this will put downward pressure on a country’s currency which could ultimately increase inflation through higher prices for imports. PP In time, if inflation is high enough and the economy is strong enough, it could convince the central bank to initiate contractionary monetary policy, such as higher interest rates. The result of that is slower economic growth. P A lot depends on which segment of society gets the tax cuts. P Cuts to lower-income families directly translate into increased spending. That boosts demand and economic growth. PP Tax cuts to higher-income families are often invested, saved, or used to pay off debt. PP That tax cuts to higher income families boosts the stock market and banks, but not retail. PP (10) (Accept any other correct relevant response) CONCLUSION Paying attention to the above discussed indicators and other features of business cycle forecasting can enable the country to prepare suitable policies to deal with the changes at hand. PP (Max.2) 40 Activity 7 Discuss ALL the features underpinning the forecasting of business cycles, excluding the economic indicators. (26 marks) Why is price stability important to prevent extreme fluctuations in business cycles? (10 marks) INTRODUCTION Business cycles is the recurring fluctuations (ups and downs) in economic activity, relative to the economic trend value. PP (2) BODY MAIN PART Extrapolation P This means using historical data and predicting the future on that basis. For example: If the economy grows or decreases continually, predictions can be made by means of extrapolation along the same trend line. PP Moving averages P Refers to the average price of an indicator over a specified period. Moving averages are used to look at price trends. PP Tables indicating the moving averages of share prices are used to indicate whether they are moving upwards or downwards. PP Information can be gathered from this on a daily, monthly or annual basis. PP As the new members (for the day, week or month) are added and the older members are deleted, the average ‘moves’. PP By calculating a moving average, a forecaster can smooth out the minor fluctuations in a data series. This makes it easier to spot trends. PP Trend line P The trend line that rises gradually will be positively sloped in the long run; the rising line indicates a growing economy. PP The trend indicates the general direction in which indexes that were used in the business cycle move. PP The trend will change when the time series data change their behaviour patterns of the past. PP However, some forces have to be overcome for that to happen e.g. Resistance points and Channels. PP 41 Length of a cycle P Measuring a cycle from peak to peak or trough to trough. PP Longer cycles show strength and shorter cycles show weakness with regard to economic activities. PP Amplitude P Measures the distance of the variable from the trend line. PP Amplitude refers to the vertical (height) difference between a trough and the next peak of a cycle. PP The larger the amplitude, the more extreme the changes that occur. PP Max 8 marks to headings and/or examples ADDITIONAL PART Why is price stability important to prevent extreme fluctuations in business cycles? Price stability leads to inflation stability. PP If prices are stable then the demand for goods and services will be stable. PP Production of goods and services will not fluctuate and employment will be stable. PP Unemployment will not increase if prices are stable. PP Interest rates will remain unchanged, and the economy will continue to grow without big fluctuation. PP CONCLUSION Government uses the monetary policy to achieve price stability and control the amount of money in circulation. PP (2) 42 Examination Tips How to prepare/study for the examination During the study process You need to draw up a timetable to study Economics every day. The Business cycle study guide aims to support you to help you to get good marks during the assessment. Use the study guide together with other sources to study towards the best possible marks in the examination. Use the structure of the question paper to guide you in preparing for the examinations Every topic and subtopic is very important if you strive to get the best marks in Economics. Do not select (spot) the content, it will hamper your opportunity to get good marks. The concepts are very important to know and describe in order to understand the content and get marks. Make time to study smart, make notes, refer to you study guide, the examination guideline and other sources to add more information to your notes. Work out the activities and compare with the solution do not give up if performance is not what you desire. Practice makes perfect. Good luck!! You have made it so far against all odds, you can!!! Good luck!!! Typical examination How to approach/ respond What to expect questions to the questions Section A Section A To cover the full scope, study Question 1 Questions all the concepts in each main Multiple question 1.1 consist of multiple choice topic. Match column A with column (8X2) (16) Knowing all your Concepts B 1.2 match column A with and the description thereof will Give the term column B (8X 1) (8) help you to get full marks in 1.3 give the most correct term/ Section A concept. No abbreviation, acronyms and examples will be accepted (6X1) (6) 43 Section B Questions 2.1.1, 3.1.1 and Only give the required number Questions 2.1.1, 3.1.1 and 4.1.1 of the correct items 4.1.1 Assess low cognitive Example of action verbs are: e.g. Answer: recovery, questions List, Give, Name. identify, etc. depression These questions will guide in Note if you listed more than the total number of items you two required only the first two need to provide e.g. answers/items will be awarded List any TWO phases of the marks in your response business cycle Questions 2.1.2, 3.1.2 and Questions 2.1.2, 3.1.2 and You should be able to apply 4.1.2 based on middle 4.1.2 access the general the current economic situation cognitive level economic content to respond to this question. Action verbs are what, why, how, etc. Questions 2.2 to 2.3 3.2, 3.3 Questions 2.2, 2.3, 3.2, 3.3, You need to know your 4.2 and 4.3 are based on 4.2 and 4.3 are based on data concepts and the description data responses. responses. to answer the data responses. based on middle cognitive The data response can be You must interpret tables, level an extract that you must analyse, draw graphs read, a cartoon that you must accurately, calculate using interpret, a graph that you the guidance from the data must draw and interpret. You responses. must study the content of the Use the content in sources data response to answer the to answer these type of questions questions. 44 Questions 2.4, 3.4 and 4.4 Questions 2.4, 3.4 and 4.4 To answer this questions and get are 8 marks, middle order are 8-marks, middle order full marks you need to study your questions. questions. For example, content thoroughly. Discuss, differentiate, The answers to these questions compare, distinguish, etc. come straight from your notes or E.g. Differentiate between the relevant economic sources. the recovery and recession You must study and summarise phases of the business cycle. it to get the full eight marks per 8 marks question Questions 2.5, 3.5 and 4.5 Questions 2.5, 3.5 and 4.5 are You are expected to relate the for 8 marks based on high questions such as analyse, content in your notes to the cognitive level. outline, how. current situations in the economy. e.g. Evaluate the impact of the give good reasons in your of COVID-19 pandemic on full answers providing practical employment. 8 marks examples. responses can have positive or negative answers or you are expected to write in full sentences that substantiate your argument or motivation. You need to be confident in attempting these questions and answer as if you are an Economist. 45 Questions 5 and 6 are Questions 5 and 6 consists The introduction is based on the based on middle and high of following sub sections: description of the topic. cognitive levels essay type introduction = 2 marks, Read your questions with questions. main part = 26 marks, understanding and focus on the additional part = 10 marks key words to give the correct conclusion = 2 marks concept description. Total essay = 40 marks in your The main part consists of headings essay type question and examples for 8 marks. The discussions of content from the sources for 18 marks the content for the main part of the essay is in your notes and in your sources. You have only to study all the content with understanding and recall. Examples of action verbs used to ask the questions are discuss or explain, draw and interpret the content for 26 marks. The additional part needs your application of the content to the current economic situation. You must substantiate your responses with practical examples. You must answer in full sentences to earn full marks. The conclusion is a summary of the discussed essay making recommendation 46 4. General Examination Tips HINT: Apply the following when answering the question paper: Section A When answering Section, A – short questions, it is important not to rush but to read the questions carefully and to make sure you understand what the question is asking. You are looking for the MOST correct answer in the multiple-choice questions. (Question 1.1) There are 4 options so try to eliminate the completely wrong answer(s). Read carefully to identify the correct answer, identify the distractors that will also appear to be correct. The answer will NEVER be two options. Only ONE option will be correct. Your answer will immediately be marked incorrect if you write TWO options. Choose a description from column B that matches the item in column A. There are 8 marks for these questions in (Question 1.2) Give ONE term for each of the following descriptions, know your concepts. There are 6 marks for these questions in each paper (Question 1.3). Know your concepts and definitions to answer these questions. No marks will be awarded for abbreviations, acronyms and examples. Section B When answering Section B - Choose 2 of the 3 questions. Read through the questions to select the ones that you know best. Use your 10 minutes reading time to identify the questions you know best. The mark allocation should guide you to the length of your answers. Discuss, explain, why, how and what type of questions should be answered in full sentences. For example: 4-mark questions must be answered with at least 2 facts, in full sentences. Calculations – Start off with the formula; then show all steps in the calculations. Specify the items when doing calculations – e.g. ◊ Consumption (C) R 1000 ◊ Government spending (G) + R 800 ◊ Investment (I) + R 250 ◊ GDP = R 2050 Paragraph (8-mark questions) Ensure that you have sufficient facts to answer the question. E.g. Differentiate between two concepts (X and Y). Write at least TWO facts for X and TWO facts for Y. The mark allocation will be (2x4=8) If required to explain or discuss, write at least four facts on the topic. The mark allocation will be (4x2=8) 47 Data response questions Answer any TWO of the three questions. Each data response question consists of 5 questions. Application type questions in question 2.5, 3.5 and 4.5 must be answered in full sentences and relate to relevant content. SECTION C – is the essay questions Answer ONE of the two questions. The introduction should be a description. Do not repeat any part of the question in your introduction. Make use of headings where possible- a maximum of 8 marks are allocated for headings and examples. Include sufficient facts to cover the 26 marks in the body. These facts should be written in full sentences to obtain maximum marks. The conclusion must not repeat any of the facts already mentioned in the body or introduction. Read the table outlining the structure of the essay to ensure that you have an appropriate conclusion. 48 References Bantjies, J. Burger, M. Engelbrecht, M. Ross, D. (2013) Focus Economics Grade 12, Maskew Miller Longman. Badernhost, I. Mabaso, GST, Mbotho, JN., Tshabalala, HSS (2011) Via Afrika Economics Grade 10, Via Afrika. Badernhost, I. Mabaso, GST, Tshabalala, HSS (2012) Via Afrika Economics Grade 12, Via Afrika. Levin, M. and Pretorius, M. (2012). Enjoy Economics Grade 12, Heinemann. Mohr & Fourie, Economics for South African Students (2011:537). Madz Okere, C (2017) The ‘Distinction-bound student’ Study Guide Grade 12. Chaplin C, Seifontein B, Van Zyl C, (2013) Solutions for all Grade 12. Internet Youtube Eloff, M. Nel, D. Pretorius, A. (2013) Clever Economics Grade 12, Macmillan. Basson, E. Beautement. V Smith, L. (2013) Oxford Successful Economics Grade 12, Oxford University Press. Acknowledgements The Department of Basic Education (DBE) gratefully acknowledges the following officials for giving up their valuable time and families, and for contributing their knowledge and expertise to develop this this study guide for the children of our country, under very stringent conditions of COVID-19. Writers: Sithembiso Tshabalala, Thabisa Ntontela-Seleho, Smangaliso Khambule, Moleboheng Rambuda, Richard Gouws, Claudette Kumalo and Lusanda Booi. DBE Subject Specialist: Percy Masango The development of the Study Guide was managed and coordinated by Ms Cheryl Weston and Dr Sandy Malapile. 49 50