Explain the various phases of the business cycle.

Discuss the view that economies will always return to the full employment level of output in the long run.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of business cycle
• diagram to show the different phases of the business cycle and possible trend line
• explanation of the business cycle in terms of the different short-run phases ie boom, recession, depression/slump and recovery, and long-term trend
• examples of specific countries being in different phases of the business cycle.

NB Examiners should be aware of variations in the business cycle diagrams candidates might draw and should be flexible in crediting the diagrams drawn by candidates.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definition of full employment, full employment level of output
• diagrams to show the two different views of the economy
• explanation of the monetarist/new classical view that the economy will always return to the full employment level of output in the long run
• examples of situations where economies either have or have not returned to full employment in the long run
• synthesis and evaluation (discuss).

Discussion may include: consideration of the Keynesian view that an economy can remain stuck in a deflationary gap, consideration of the role of government, consideration of the word “always”.

This question was generally well answered by students who explained how the economy changes during different phases of the business cycle. It was interesting to see the variety of approaches to the business cycle used by students but the overall theme of how real GDP/economic growth changes over time was clearly understood in many answers. In the highest achieving responses students were able to explain how real GDP changes overtime and how this affected inflation and unemployment. The highest achieving responses supported this with real-world examples of how the business cycle has affected particular countries.

There were a mixed set of responses to this question. Effective answers involved students showing a good understanding of the theory involved by explaining how an economy might return to full employment in the long run using the Monetarist/Neo Classical model where short-run aggregate supply changes when the economy is in either an inflationary or deflationary gap situation. This was supported with clear aggregate demand and supply diagrams. Some candidates who did not have a sound grasp of this theory really struggled to answer the question. The highest achieving responses went on to evaluate the view that economies always return to full employment by, for example, putting forward the Keynesian view that an economy can get stuck in a deflationary situation because wages do not adjust downwards. Well-developed real-world examples allowed students to access the very highest marks.