ad curve aggregate demand-aggregate supply model 4, boom in economy, boom period, depiction of business cycle, explanation of the process, how economy works, infrastructure, infrastructure bottleneck, meaning of business cycle, medium to long run, peak out, peak-out in economy, recession, recession in the economy, recovery phase, recovery phase in the economy, social bottlenecks, the business cycle, types of bottlenecks in Indian economy, when ad>as
the business cycle, how the economy works, 4 phases of the economy, types of bottlenecks present in the Indian economy,whenAD>AS whenAD<AS
aggregate demand-aggregate supply model
2. What is business cycle
Business cycles are characterized by boom in one period and collapse in the
subsequent period in the economic activities of a country.
These fluctuations in the economic activities are termed as phases of business
cycles.
The upward and downward fluctuations in the cumulative economic magnitudes of
a country show variations in different economic activities in terms of production,
investment, employment, credits, prices, and wages. Such changes represent
different phases of business cycles.
5. 4 phases in every development
economy
Boom
The line of cycle that moves above the steady growth line represents the boom phase
of a business cycle. In the boom phase, there is an increase in various economic
factors, such as production, employment, output, wages, profits, demand and supply
of products, and sales.
In addition, in the boom phase, the prices of factor of production and output
increases simultaneously. In this phase, debtors are generally in good financial
condition to repay their debts; therefore, creditors lend money at higher interest rates.
This leads to an increase in the flow of money.
6. Peak out
The growth in the expansion phase eventually slows down and reaches to
its peak. This phase is known as peak phase. In other words, peak phase
refers to the phase in which the increase in growth rate of business cycle
achieves its maximum limit. In peak phase, the economic factors, such as
production, profit, sales, and employment, are higher, but do not increase
further. In peak phase, there is a gradual decrease in the demand of
various products due to increase in the prices of input.
7. Recession
In recession phase, all the economic factors, such as
production, prices, saving and investment, starts decreasing.
Generally, producers are unaware of decrease in the demand
of products and they continue to produce goods and services.
In such a case, the supply of products exceeds the demand.
8. Recovery phase
In, consumers increase their rate of consumption, as they
assume that there would be no further reduction in the prices
of products. As a result, the demand for consumer products
increases.
In addition in recovery phase, bankers start utilizing their
accumulated cash balances by declining the lending rate and
increasing investment in various securities and bonds.
Similarly, adopting a positive approach other private investors
also start investing in the stock market As a result, security
prices increase and rate of interest decreases.
9. When AD>AS
Effect of unemployment in short run
• Expansionary or fiscal policy
• Money supply in the economy increases
• Aggregate expense increases
• SS being given and constant
• Prices starts increasing
• Profits increase losses falls
• future production increases
• Employment increases
10. Medium-Long run
• Expansionary or fiscal policy
• Money SS increases in the economy
• Aggregate expenses increases
• SS being given and constant (shortage of stock)
• Prices start increasing
• Cost of input increases
• Cost of production increases
• Prices increases
• aggregate demand decreases
• surplus stock
• production decreases
• unemployment
11. Brief of business cycle
AD>AS AD<AS
Correction of unemployment results in employment as there is excess of money in
the economy
Expansionary policies taken by the government
As aggregate supply bottle neck exist in the economy all the steps taken to correct
AS in the economy do not work in the desired manner
12. Types of bottle necks in the economy
Social
Brain drain in higher education
High government debt
Most spending done on welfare schemes launched
A third of the government's expenditure is spent on interest
payments and subsidies
13. Infrastructure
Infrastructure bottlenecks in India are the result of protracted delays in clearances,
‘appalling inefficiencies’ in execution and greed for money and power that is at the
root cause of delays
Prior to the shift in economic policy, it was the need for licenses and permits that
were a constraint. But subsequently, the need for clearances and permits has
supplanted licenses.
Poor coordination between different arms of the Government, and turf war
between authorities have stymied efforts at expediting clearances through either
the National Investment Board or the single-window clearance earlier.
14. Other types of bottle necks present in the
economy
Technological
Production capacity
High number of licensing
Political
Affordable education
Education to all sectors of society
Etc.
15. Cont.…..(with explanation)
Production in the economy decreases
Imports form foreign countries increases
Imports increases as there is not sufficient production in the country to meet the
requirement and demand of the customers.
But the exports do not increase
As there is no access supply in the market so all the goods produced by the firms
are used in domestic consumption so there is no surplus stock to export and have
sufficient forex to balance the imports.
16. Cont.…..(with explanation)
Money brought in by FIIs (financial intuitional investors)but it is not sufficient to
meet the requirement of BOT
Due to various bottle necks present in the economy so foreigner's prefers to invest
by the wat=y of FIIs not through FDI as they have fear to loose there money.
BOP becomes deficit
Bop becomes deficit because our imports are more than our exports forex reserves
starts declining to cater day to day need and essential requirement of the people.
17. Cont.…..(with explanation)
Demand for forex increases
As every one in the economy tries to import as it is much cheaper than domestic
market so forex falls short due to high demand of it, in result prices of the forex
start increases.
Domestic currency depreciates
As our currency is free floating ,so as the demand for forex start increasing due to
high number of imports the domestic currency starts depreciating and falls short.
