Definition
The definition of a business cycle is a consecutive periods of alternations of economic activity. These fluctuations occur around long-term growth trend, and usually involve alternating shifts over time periods of accelerated economic growth and periods of decay.
Periods of a business cycle
Causes for business cycles
There are lots of causes for business cycles the first one is:
• Interest rates. Alterations of the interest rate causes affect consumer spending and the growth of the economy. For example, if the contraction of the interest rate decreases there will be a reduction in price of consumer goods which will encourage consumer spending. This leads to higher spending and economic growth because people stop worrying about spending their money.
• Consumer and Business confidence. People are easily influenced by external factors and events. If there is consecutive of deplorable economic news, this usually leads to discouragement of people from spending and investing their income this causes a small downturn into a huge leakage of money, as people reduce their spending. Once the economy recovers from that, Confidence increases which leads more bank loans. With this people are more confident in spending their income.
The Essay on Business Cycles and Economic Outlook
Business Cycles and Economic Outlook 1. What data from the BEA announcement supports the NBER decision that the U.S. is in a recession? Answer: In December 2008 the National Bureau of Economic Research (NBER) declared that a recession had begun in the U.S. economy in December 2007. A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, ...
• The Multiplier effect. The Multiplier effect is defined by the decline in injections which may cause an immense final drop in real GDP. For example the government reduce the amount they spend on public investment; there will be a fall in aggregate demand and impoverishing the employment rate causing people to become unemployed, this will lead to even lower demand in the economy. However, an injection could have an affirmative multiplier effect.
• The Accelerator effect. The accelerator effect expresses that investment relies on the rate of change of economic growth. If the growth rate staggers, firms will reduce investment because their expectation of output to rise as fast as they want it to.
• Inventory Cycle. This states how inventory cycles through the business to its consumers, however there could be a radical change in prices making consumer spending more apparent causing the consumers buying more luxury goods. For example buying a car every 5 years could change to buying a new car every 3 years, this will increase the effect of economic growth.
Causes of Recessions
The business cycle can go into recession for a number of reasons such as
Factors that can cause a fall in aggregate demand
• Higher interest rates means reduced consumer spending and investing.
• Falling confidence of consumers
• Increase in the exchange rate making exports more expensive which reduces the demand for exports.
• Credit crunch. This means the decline in banking lending therefore lowering investment
Policies of business cycles
These policies are part of the business cycle and they are monetary theories created to expel, modify, or reduce the fluctuations found in economic activity. These microeconomic policies manipulate or reduce the recession phases within the business cycle. The most common business cycle theories used are Keynesian, Marxist, and Austrian.
Keynesian Policies
Many countries apply Keynesian Theory to stabilize fluctuations in the countries’ business cycles. The person who crafted the Keynesian microeconomics Theory was Economist John Maynard Keynes. He wrote a book in 1936 called “The General Theory of Employment, Interest and Money”, Keynes used his theory to explain those recessions and expansions of the economy are caused by the alternations in demand for products and services. Keynes thought that when a recession occurs, governments could reduce the duration or harm caused from the downturns by increasing the supply of money, increasing government spending or by reducing taxes to manipulate alternations in the business cycle.
The Essay on Business Cycle Theory
In this model, economists pursue the sluggish adjustment of nominal wages path to explain why it is that the short-run aggregate supply curve is upward sloping. For sticky nominal wages, an increase in the price level lowers the real wage therefore making labor cheaper for firms. Cheaper labor means that firms will hire more labor, and the increased labor will in turn produce more output. The time ...
The cover of John Keynes’ book “The General Theory of Employment, Interest and Money”
Marxist Policies
Karl Marx was a philosopher who believed that alternations within the business cycle were a natural part of a capitalistic economy caused by worker exploitation. Marx’s theories became the fundamentals for a socialist theory that later became the model of communism. Marxist economists believe that alternations in the business cycle end by removing the goal of business achieving business profit. Marxist’s economies collect all of the monetary supply and then hand out money based on a centralized plan.
The Austrian Theory
The Austrian Theory uses supply-side monetary controls to level the alternations in the business cycle. The theory believes that alternations in the business cycle result from bank interest rate alternations combined with cash reserve banking polices. For example, low interest rate usually encourages borrowers, causing banks to use large percentage of their liquid assets for credit lending. Noble Prize-winning economist Friedrich von Hayek was a primary supporter of this theory.
Fiscal policy
Fiscal policy is connected to the income multiplier effect, whereby a minuscule change in spending produces an appropriately larger incline in national income also known as GDP(Gross Domestic Product).Fiscal policy direct definition is the use of government budget to influence economic activity.
Business cycle Forecasting
It is the work of an economist to forecast the fluctuations within the business cycle to prepare for what could happen. For example to forecast that we will be in depression so there will be price hikes so businesses can plan accordingly to survive through the period of depression.
The Essay on Business Cycle People Money Economy
In everyday society, companies are affected by the economy. The company either suffers or benefits depending on what kind of economy it is. This will depend on what kind of company it is, and what kind of market the business does well in. The Business Cycle is what determines this factor. It is a term used in economics to designate changes in the economy. Timing of the business cycle is not ...
Indicators
Economists can look at indicators to forecast what can predict what can happen in our economy. The most basic forecast is done by analysing changes in the numerical values of indicators. An example of this is time series data. Another word for indicators is variables thus one can define indicators to work on coincidence but can also be predicted by analysing data but doing this only gives a little idea what can happen. But this does not mean it is predictable as for example a huge natural disaster can occur destroying the supply of grain thus there will be a lack of maize meal, which can lead to a depression on the economy as food prices will rise.
Leading indicators
Basically the economy can always expect an upswing therefore no matter how deplorable the economy is it will change. That being said you can define a business cycle to be periodically but you do not know how long a certain period will take. This can liquidate businesses if not prepared.
