be fast Task 5 The figure below illustrates nominal (in current prices) and real
ID: 1143840 • Letter: B
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Task 5 The figure below illustrates nominal (in current prices) and real (in prices of previous year) GDP of Lithuania in 2000- 2015, in billion euro. Lithuania 50 40 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDP (constant 2010 US$) GDP (current US$) a) Using the figure above, highlight 4 stages of business cycle and describe each stage. b) What problem is observed in 2008-2009? c) What should the government and the Central bank do in this situation?Explanation / Answer
a.
The four stages of business cycles are expansion, peak, contraction and trough.
Expansion: this is when economy is growing. GDP is increasing and the growth rate that GDP is around 2-3%. The stock market is in bull market. In the figure, period 2000 to 2008 was expansion.
Peak: it is the second phase. It is the phase when the expansion transition into the contraction phase. In the figure, 2008 was a period of boom.
Contraction: It is the stage when economic growth weakens and GDP falls below 2%. It starts at the peak and ends at the trough. When it turns negative for consecutive 2 quarters, it is called recession. In the figure, 2008-09 and 2014-15 show contraction.
Trough is the fourth phase. That's the month when the economy transitions from the contraction phase to the expansion phase. It's when the economy hits bottom. Unemployment rate is very high. In the figure, 2009 and 2015 shows trough.
b . In 2008, economy sees the boom when everything was good in the economy, GDP was growing, unemployment was low, stock market boomed and in 2009, economy faces contraction. Sudden fall in GDP and high unemployment.
c. The government should increase expenditure and reduce taxes to support the economy.
The Central Bank should decrese the interest rate to increase the money supply and therefore support consumption.
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