This document discusses the business cycle and its phases of expansion, peak, contraction, and trough. It explains that the business cycle refers to the natural rise and fall of economic growth over time. The four phases and characteristics of each phase are defined. Causes of the business cycle are explored including changes in demand, investment, monetary and fiscal policy, as well as external factors like wars and natural disasters. Keynes' theory of the business cycle and how fluctuations in the marginal efficiency of capital can cause the cycle is also summarized. The roles of government and central banks in managing the business cycle through fiscal and monetary policy are outlined.

1. Unit-III

3. Ups and Down are normal to every
economy.

4. • The business cycle is the natural rise and fall
of economic growth that occurs over time.
The cycle is a useful tool for analyzing the
economy.
• The term “business cycle” (or economic cycle
or boom-bust cycle) refers to economy-wide
fluctuations in production, trade, and general
economic activity.
• Each business cycle has four phases:
expansion, peak, contraction and trough.

5. Business Ups & Downs

6. • An expansion is characterized by increasing
employment, economic growth, and upward
pressure on prices.
• A peak is 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.

7. • Following a peak, the economy typically enters into a
correction which is characterized by
a contraction where growth slows, employment
declines (unemployment increases), and pricing
pressures subside.
• The slowing ceases at the trough and at this point
the economy has hit a bottom from which the next
phase of expansion and contraction will emerge.

8. What causes the highs and lows???

9. Internal
• Change in Demand
• Change in Investments
• Change in Macroeconomic Policies
such as Fiscal Policy.
• Supply of Money or Monetary Policy
External
• Wars
• Natural Disasters

10. Keynes Theory of Business Cycle
• According to Keynes, business cycle is caused by variations in
the rate of investment caused by fluctuations in the Marginal
Efficiency of Capital. The term ‘marginal efficiency of capital’
means the expected profits from new investments.
Entrepreneurial activity depends upon profit expectations. In
his business cycle theory, Keynes assigns the major role to
expectations.
• Business cycles are periodic fluctuations of employment,
income and output. According to Keynes, income and output
depend upon the volume of employment. The volume of
employment is determined by three variables: the marginal
efficiency of capital, the rate of interest and the propensity to
consume.

11. • In the short period the rate of interest and the propensity to
consume are more or less stable. Therefore, fluctuations in
the volume of employment are caused by fluctuations in the
marginal efficiency of capital
The Phases:
• The course of a business cycle, according to the Keynesian
theory, runs as follows.
• During the period of expansion the marginal efficiency of
capital is high. Businessmen are optimistic; investment goes
on at a rapid pace; employment is high; and incomes are
rising, each increment of investment causing a multiple
increase of income.

12. • Towards the end of the period, the high marginal efficiency of
capital receives a setback from two directions:
• (i) The cost of production of new capital assets increases as
shortages and bottlenecks of materials and of labour arise,
and (ii) owing to the abundance of output, profits are
lowered.
• https://youtu.be/9fIaAGehOco

13. Who Manages the Business Cycle?
• The government manages the business cycle. Legislators
use fiscal Policy to influence the economy.8 They use
expansionary fiscal policy when they want to end a recession
and should employ contractionary fiscal policy to keep the
economy from overheating.
• The nation's central bank uses monetary policy. It lowers
interest rates to end a contraction or trough, called
expansionary monetary policy. The central bank raises rates to
manage an expansion so it doesn't peak. That's
contractionary monetary policy.

14. Who Measures the Business Cycle?
• The National Bureau of Economic Research
determines business cycle stages using
quarterly GDP growth rates.6 It also uses
monthly economic indicators, such as
employment, real personal income, industrial
production, and retail sales. It takes time to
analyze this data, so the NBER doesn't tell you
the phase until after it's begun.

15. Key Takeaways
• The business cycle goes through four major
phases: expansion, peak, contraction, and
trough.
• All businesses and economies go through this
cycle, though the length varies.
• The Federal Reserve helps manage the cycle with
monetary policy, while heads of state and
governing bodies use fiscal policy.
• Consumer confidence plays a role in managing
the economy and the current phase in the cycle.