Business Cycles Flashcards
What is a Business Cycle?
The Business Cycle shows the difference between actual and potential growth of the economy.
The 4 Phases of an Economic (Business) Cycle:
- Boom
- Recession
- Depression
- Recovery
The 4 Phases of a Business Cycle:
Boom
- consumption, sales and profits are high
- prices are rising (leading to inflation)
- strong production
- low unemployment
The 4 Phases of a Business Cycle:
Recession (Negative GDP for 6 Months)
- Economic activity, demand and prices go down
- lower production
- rising unemployment
The 4 Phases of a Business Cycle:
Depression
- High unemployment
- Low production
- Demand at all time low, consumption
- Deflation, Bankruptcy
The 4 Phases of a Business Cycle:
Recovery
- confidence recovers
- production picks up
- consumption, Investment, sales all rise
Main cyclical indicators:
- Leading
- Coincidental
- Lagging
Main cyclical indicators:
Leading
2 - 3 months ahead of the business cycle — consumer and producer confidence, stock Prices, building permits
Main cyclical indicators:
Coincidental
Coincide with the business cycle — GDP (C,I,G,X,M), sales, production, income, trade
Main cyclical indicators:
Lagging
2 - 3 months behind the business cycle — unemployment and inflation, main interest rates of banks, wage rates
The Multiplier Effect
An increase in injections into the economy can cause a multiplier effect.
- Positive: initial government spending can cause a bigger final increase in Real GDP
- Negative: initial government spending can cause a lower final increase in Real GDP
The Accelerator Effect
Refers to how the change in Demand for consumer Goods and Services leads to a change in demand for capital assets.
(with increased Demand and Firms aiming to maximize Profits spare capacity / inventories will be utilized)
Counter-cyclical policies:
in a recession / depression
- Expansionary fiscal policy:
government spending up
Taxes down
-Expansionary monetary policy:
interest rates down
- Supply side:
increase subsidies
improve training opportunities
—> Negative impact on Government Budget
Counter-cyclical policies:
during a Boom / Recovery
- Austerity policies: (Greece)
reduce government debt
government spending down
Taxes up
—> recovery is slow, high unemployment persists and businesses suffer, young, unemployed and elderly suffer
Automatic Stabilizers
Aim to prevent a depression, and make the effects of the recession lighter on the population. Multiplier effect.
ex: progressive taxation…
