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The Business Cycle

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Rumana Ali

on 23 April 2013

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Transcript of The Business Cycle

By Rumana Ali January 2013 The Business Cycle What is the business cycle? -The business cycle refers to the fluctuations in GDP around its underlying trend.
-The use of the word cycle suggests that things happen again and again, every so often. A typical diagram of the business cycle...
-Trough/Bust Real GDP Good times Bad times Observe the Fluctuations in
(anything that is below/above the Trend GDP) Trend GDP What do these stages mean for an economy? Can you spot the 4 stages of the business cycle? Stages: Expansion An expansion is a time when:
-Businesses are expanding
-Hence producing more goods
-Hiring more workers

This is generally a happy time for people because:
-More money is coming into the economy
-Therefore people and businesses are able to afford more things than they normally might be. Peak -A peak is usually identified after it happens.
-This is the time when a country's expansion is at its highest level.
-Economists don't really know when the expansion is going to peak.
-They wait until production and hiring start to fall, then identify the peak. Contraction/Recession -A contraction/recession is the
reverse of an expansion.
It's a time when:
-Production goes down
-Hiring goes down

-People are generally less happy than they are during an expansion.
-A country's output commonly decreases during a contraction, as does consumer confidence. BUST: The Great Depression -If a recession lasts a particularly long time and gets progressively worse, economists might call it a depression.
-Economically, things are really bad.
-A prime example of this in American history was the Great Depression of the 1930s
-This lasted more than a decade and resulted in thousands of people losing their jobs and their life savings. Trough -A trough is the opposite of a peak.
-It is the low point of an economy.
-As they do with a peak, economists will identify a trough only after productivity begins to head upward again; the low point can then be calculated. At what point in the
Business Cycle does
the government
intervene? -During an economic recession, unemployment rises while incomes, business investment and consumer spending fall.
-Monetary policy aims to shorten recessions by encouraging consumer spending and investment.
-It takes time for policy decisions to be felt throughout the economy at large.
Examples of fiscal and monetary policies include:
-Higher government spending in an attempt to stimulate the economy (injections in the circular flow); could provide subsidies, benefits, reduce taxes.
-A reduction in short-term interest rates encourages more investment by reducing the cost of borrowing.
-E.g. The 'New Deal' offered by President Franklin D. Roosevelt helped the American economy get back on its feet after the Great Depression. Government actions in a contraction/
recession Government actions in an expansion/
boom -When things are going well economically i.e. a boom is 'on the go';
-The government will be hesitant to do much to the economy, preferring to "not to mess with success."
-In this period of the business cycle, the government will have adopted 'Laissez faire' more than it will do in any other period of the business cycle. Laissez faire (French for):
'Leave it alone' BOOM: The Roaring 20s -1920s America was a time best remembered for fantastic new consumer products, and a vibrant and creative urban cultural scene.
-Mass production meant that Henry Ford could produce lots of Model T Fords.
-The Ford industry was just an example of a booming industry in America during this time.
-It was a big employer and made lots of money
-America truly experienced prosperity in the 20s, but when the decade came to an end so did the boom.
-Expansion ended, and contraction began i.e. The Great Depression 1930.
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