The Business Environment and Concepts (BEC) test is one of four exams you must pass to obtain your CPA license. Consequently, the BEC material covers many business management topics; portions of the test includes economic concepts, including topics related to the business cycle, supply and demand curves, and market influences.
Use this discussion to understand five important economic topics on the BEC test. This way, you can ensure that you have all the knowledge required to pass the CPA exam with flying colors!
Four Phases of the Business Cycle
The business cycle is based on gross domestic product (GDP), which measures total US economic output. Although the length of a particular business cycle is difficult to predict, economic activity does follow the pattern described by each phase of the cycle.
Economic analysts use data from the National Bureau of Economic Research (NBER); the business cycles are determined using GDP growth rates, employment, personal income, manufacturing production, and sales metrics.
Here are the four phases of the business cycle listed in the order in which they occur:
- Expansion: GDP is growing during the expansion phase. This phase ends as the economy starts to “overheat,” meaning that growth and inflation are both growing at a relatively fast rate.
- Peak: At the end of the expansion phase, the economy reaches a peak of economic activity and then transitions into a contraction.
- Contraction: Economic growth slows during this phase and GDP growth may slow to a percentage rate of zero or lower, with negative GDP growth defined as a recession. Unemployment will start to increase at the end of this phase.
- Trough: As the name implies, economy growth “bottoms out” in the trough, and the economic contraction moves toward an expansion phase.
You’ll see test questions on the four phases of the business cycle and you’ll be asked to put the phases in the correct order. Be prepared!
Fiscal Policy vs. Monetary Policy
The US federal government attempts to manage the business cycle using fiscal policy, while the central bank uses monetary policy to influence the business cycle.
If the government is attempting to expand the economy, they may use some combination of tax cuts and increased government spending. These policies are designed to get more dollars in the hands of consumers so that economic activity can increase.
Expansionary economic policy, however, contributes to government deficits; these policies are used during a recession or in anticipation of a recession.
If government leaders believe that economic growth is causing inflation, legislators may try to slow the economy using contractionary fiscal policies, such as raising taxes and cutting government spending.
The US central bank, referred to as the Federal Reserve System (FED), implements monetary policy by managing the money supply, which impacts interest rates.
The FED can increase the available money supply by purchasing government bonds; the additional money in the economy lowers interest rates. This strategy is an attempt to increase economic activity but this approach also increases the risk of inflation.
On the other hand, the FED can reduce the supply of money by issuing government bonds, which takes money out of the economy. This strategy increases interest rates and slows economic activity.
Another FED tool is to increase or lower the FED funds rate: the interest rate that banks charge each other for FED-required reserve deposits held overnight. If the FED changes the bank’s cost to borrow money, lending institutions will change interest rates charged to customers, which has an impact on economic growth.
The BEC test also covers several terms related to the rate of employment, and these definitions can be confusing. Make sure that you understand each of these concepts before sitting for the exam:
- Frictional unemployment: This term refers to a period of unemployment when a worker is searching for work or making a transition from job A to job B.
- Structural unemployment: This type of unemployment is caused when a worker’s skills are no longer needed or relevant for a particular type of job. Changes in technology may be the biggest cause of structural unemployment.
- Natural rate of unemployment: When frictional and structural unemployment are combined, the total is referred to as the natural rate of unemployment. This unemployment rate exists during an expanding economy, because a certain number of workers are between jobs or working in jobs that have become obsolete.
- Labor participation rate: This rate is based on this formula: (Number of people available to work) / (Total population). This rate is a factor in the amount of production available in the economy.
Here’s a helpful tip: put these terms on an index card so that you can keep the differences straight in your mind as you study!
Supply And Demand Curves
Supply and demand curves are an important starting point for understanding economics, as these concepts are on the BEC exam. Keep in mind that both curves are presented on a graph with a horizontal and vertical axis.
- Supply curve: This curve explains the relationship between the cost of a product or service and the quantity of the product supplied for a specific time period.
- Demand curve: This graph displays the relationship between the price of a good and the amount of the good that customers are willing to pay at a given price.
- Elasticity: If prices change, the amount of supply or demand change is referred to as elasticity. Will a price increase, for example, sharply decrease the number of people who are willing to buy, or are most customers still satisfied, even it they pay more?
Find a CPA exam prep course that presents these concepts graphically and you’ll be able to master this content!
Finally, topics concerning economic events that can influence markets are covered on the BEC test as well:
- Economic lag: A change in fiscal policy or monetary policy takes time to implement. This “lag” is the amount of time it takes the government or the FED to respond to a sudden change in the economy. The mortgage crisis of ’07 to ’08 is a good example that illustrates the concept.
- Keynesian economics: This is a set of economic theories, which state that, in the short term, output in the economy is influenced by aggregate demand. The theory suggests that this relationship is particularly strong during recessions.
- Price discrimination: This is a pricing strategy in which similar (or identical) products are sold at different prices. An individual company sells the same product at different prices in a number of markets. The point to remember is that prices for the same product may vary greatly, depending on where the item is purchased.
These concepts each have an impact on the overall economy. Coincidentally, they also have a major impact on your CPA exam score since they will be covered on the test!
While these topics are covered on the BEC test, these concepts will also be useful as you advance in your career. Business managers and owners must understand the basics of economics in order to make informed business decisions.