The Business Cycle

The Business Cycle GDP TIME Growth Peak Recession Trough or Depression

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.

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).

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.

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.

A Good Cycle More goods produced More jobs More spending

A Bad Cycle Less Spending Fewer Goods Produced Fewer Jobs

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 .

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.

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.

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

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.

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

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

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The Business Cycle

by James Henry

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