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Understanding the Business Cycle: Expansions, Contractions, and Recessions, Slides of Macroeconomics

An overview of the business cycle, explaining what it is, its stages, and how it is measured. It also discusses the political business cycle and its impact on economic policy. Information on the expansion and contraction phases, as well as the recession and recovery.

Typology: Slides

2011/2012

Uploaded on 07/12/2012

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Download Understanding the Business Cycle: Expansions, Contractions, and Recessions and more Slides Macroeconomics in PDF only on Docsity!

BUSINESS CYCLE

What is a business cycle?

  • A business cycle refers to periods of expansion

and contraction.

  • A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

According to Arthur F. Burns

  • Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises. ‡A cycle consists of: Expansions. Contractions

Politically based business cycle.

  • The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on E lection Day.

Stages of Business Cycle 

  • Expansion : A speedup in the pace of economic

activity.

  • ‡ Peak : The upper turning of a business cycle.
  • ‡ Contraction : A slowdown in the pace of

economic activity.

  • ‡ Trough : The lower turning point of a business

cycle, where a contraction turns into an expansion

Stages

Expansion

  • Production up
  • E mployment up

‡ Peak

  • Production highest
  • E mployment highest
  • Inflationary pressure

Peak

  • Low levels of unemployment - shortages of

labour occur pushing up wage rates

  • ‡ High levels of consumer borrowing and spending ‡ Firms working at full capacity ‡ Profit levels high ‡ Inflation Increasing ‡ Interest rates increasing ‡ Boom in housing market

Recession

  • ‡ Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction.
  • ‡Production as measured by Gross Domestic Product (GDP),employment, investment spending, capacity utilization household incomes, business profits and inflation fall during recessions.
  • ‡Bankruptcies and the unemployment rate rises.

Recovery

  • Consumer confidence grows leading to

increased borrowing and spending

  • ‡Firms increase output build up stock levels ‡Spare capacity used, then‡ Investment occurs ‡Unemployment falls it make take more than a year of recovery for large changes in unemployment.