The Business Cycle
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The document discusses the business cycle, which consists of four phases: expansion/growth, peak, recession, and trough/depression. During expansion, spending and employment rise until reaching a peak. Then a recession begins as spending and employment fall. The cycle bottoms out at a trough, with low production and high unemployment, before beginning expansion again. The business cycle is influenced by internal factors like consumption, investment, and government policy, as well as external factors such as technology and wars. The government uses fiscal and monetary policy to stabilize the economy and prevent severe recessions or inflation.
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The Business Cycle
- 1. The Business Cycle GDP TIME Growth Peak Recession Trough or Depression
- 2. PHASES OF THE BUSINESS CYCLE Expansion/Growth : During this phase of the business cycle, consumer and business spending rise. Unemployment will drop during this phase, which will further aid consumer spending. Peak : After a period of growth, an economy will reach a peak, where business is producing at or near full capacity, and the economy is at or near full employment. Recession : This is a phase when real GDP begins to decline. Consumers and business reduce their spending, unemployment rises, investment declines, and pessimism about the economy is likely to grow. Trough/Depression : This is the lowest point of the business cycle. Factories will be operating below capacity, allowing unemployment to reach high levels. Jobs are difficult to find in this phase, and many businesses may fail.
- 3. CAUSES OF BUSINESS CYCLES Internal Factors: 1. Consumption : When consumer spending increases, businesses will increase production- causing them to hire more workers and purchase more materials and capital goods. When consumer spending decreases, the opposite will occur. 2. Business investment : The purchasing of capital goods increases the number of jobs in the economy because people have to make those goods. If investments increases, the economy will grow, if investment decreases, the economy will contract. 3. Government activity : The government can influence the business cycle through fiscal policy (its tax and spend policies) and monetary policy (its control of the money supply, largely through the federal reserve).
- 4. CAUSES OF BUSINESS CYCLES External factors 1. Inventions and innovation : Major changes in technology can influence the business cycle. Usually technological changes move the economy in a positive direction, but this is not always so. 2. Wars and political events : The impact of such events on the economy are very fact specific- in other words, difficult to generalize about.
- 5. A THOUGHT ON THE BUSINESS CYCLE The business cycle tends to be self-sustaining. In other words, when in a period of growth, the economy will continue to grow (jobs leading to jobs) until some event (internal or external) intercedes.
- 6. A Good Cycle More goods produced More jobs More spending
- 7. A Bad Cycle Less Spending Fewer Goods Produced Fewer Jobs
- 8. GOVERNMENT AND THE BUSINESS CYCLE In order to prevent the economy from running too hot (inflation) or too cold (recession/depression), the government often becomes involved in efforts to try and stabilize the economy. The government has two major tools to try and stabilize the economy and achieve its goals: fiscal policy and monetary policy .
- 9. MONETARY POLICY There is a relationship between the amount of money in the economy (the money supply) and the level of business activity. If the money supply increases, consumer spending will increase, promoting growth. If the money supply decreases, the economy is likely to contract.
- 10. MONETARY POLICY The government, through the Federal Reserve , can regulate the money supply to attempt to promote or inhibit economic activity. What the ‘Fed’ does most often is raise (to slow the economy down) or lower (to speed the economy up) interest rates.
- 11. MONETARY POLICY Tight money - Designed to stop/slow inflation Reduce money supply Raise interest rates Loose money – Stop/slow recession Increase money supply Lower interest rates
- 12. FISCAL POLICY Fiscal policy is the taxing and spending decisions that are made by the President and Congress. Fiscal policy actions of the government fall into two general categories: Raise or Lower Taxes Increase or Decrease Government Spending.
- 13. During a Recession The Government can Lower taxes and/or Increase spending These actions boost the economy by putting more money in the hands of people so they can spend it. This is called Expansionary Fiscal Policy FISCAL POLICY
- 14. During times of high inflation The Government can Raise taxes and/or Decrease spending These actions slow the economy by taking money out of the hands of people, taking fuel away from the economy. This is called Restrictive Fiscal Policy FISCAL POLICY