Edev Mid 5 Flashcards
business cycle four distinct phases
PEAK, RECESSION/CONTRACTION, TROUGH and EXPANSION
the highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full employment , and inflationary pressures on prices are evident.
PEAK
growth slows, employment declines (unemployment increases), and pricing pressures subside.
RECESSION/CONTRACTION
The slowing ceases and at this point the economy has hit a bottom from which the next phase of expansion and contraction will emerge.
TROUGH
characterized by increasing employment, economic growth, and upward pressure on prices.
EXPANSION
Employment levels remain stable and the economy is reliant on productivity growth to stimulate output. Business investment starts to stagnant as the growth of future demand starts to diminish.
PEAK
Businesses will continue to invest, but on a nationwide scale, there is stagnation. What results is a limited economic movement.
PEAK
which we associate with declining employment, business investment, and consumer confidence. Jobs are lost and the overall demand for goods and services is harmed as a result.
Recession/Contraction
During this phase, the economy has suffered the worst of the decline. Economic growth remains stagnant, with aggregate demand failing to pick up.
Trough
Central banks respond by trying to reduce interest rates or ‘printing’ new money. The aim is to stimulate demand in the economy. For example, if interest rates are lower, it means both businesses and consumers have lower repayment costs; allowing them to spend on other goods.
Trough
Causes of Business Cycles
- Political Uncertainty
- High Interest Rates
- Declining Real Incomes
- Higher Taxes
- Reduced Government Spending
- High Business Confidence
- Productivity Increases
- Reduced Trade Barriers
creates fear among the business community which prevents or delays investment. This not only reduces the amount of domestic investment but also foreign direct investment
- Political Uncertainty
make it more difficult for businesses to invest. It also sucks out money from the economy and re-directs it to the banks. As the interest rates are so high, businesses and consumers reduce their demand for credit. In turn, there is a contraction in the money supply which can lead to deflation.
- High Interest Rates
can be dire if not managed correctly and subtly by central banks. If the interest rates are increased too fast, too high, and too rapidly, we will see the effects such as lower business investment and deflation. Therefore, it can contribute to a transition towards an economic contraction in the business cycle.
- High Interest Rates
means consumers have less income to spend on goods and services in the economy. In turn, a prolonged period of decline in real incomes can contribute to an economic contraction in the business cycle.
- Declining Real Incomes
Inflation can create a drain on consumer incomes as it decreases its value year on year. Therefore, if firms do not increase wages in line with inflation, the average worker will be able to afford less than before.
- Declining Real Incomes
average consumer has less disposable income, which can contribute to a decline in consumption. Consequently, as consumers demand fewer goods, the overall economy can slide into the contraction phase of the business cycle.
- Higher Taxes
With consumers spending less, there is less demand for goods and services. In turn, the need for businesses to employ as many workers also declines, meaning an increase in employment. We then have a potential downwards spiral by which lower consumer demand leads to unemployment, which leads to a further reduction in demand.
- Higher Taxes
As governments reduce spending, it can create a contractionary effect on the business cycle. However, it depends if it is also aligned with a decrease in taxation and whether the savings are spent in reducing debt.
- Reduced Government Spending
If the government reduces spending to pay off its debt, it can create a trough in the business cycle. This is because the government is still taking the same revenues from the public. There is a negative effect as the government spends less, which is a component of GDP, therefore contributing to a contraction. However, there is a positive effect. If they are paying off debt, this increases the amount of credit available to the rest of the economy. So it may make it easier for businesses to obtain credit to expand their investment
- Reduced Government Spending
they are more likely to spend and invest. Therefore, we see an expansion in the business cycle.
- High Business Confidence
may increase because of growing consumer demand, or a reduction in uncertainty. In turn, businesses are more likely to invest as they anticipate further demand in the future.
- High Business Confidence
If the productivity of the economy on the whole increases, it means fewer resources are needed to produce the same level of output. This makes it cheaper to produce goods, meaning lower prices can be afforded. In turn, these savings are passed on into the wider economy. Whether this is through lower prices to the consumer or higher profits to businesses.
- Productivity Increases
What this does is create more funds for consumers and businesses to spend elsewhere. In turn, this increases consumer demand and business investment in the long run.
- Productivity Increases
