Business Cycle

businesscycle


Basics
Over time, the economy tends to go through a repeating Business Cycle:
• Peak
• Recession
• Trough
• Expansion
• [Repeat]

Fiscal Policy refers to actions taken by the U.S. government to influence the Business Cycle.

Monetary Policy refers to actions taken by the Federal Reserve, the Central Bank of the United States, to influence the Business Cycle.

All things considered, the historical trend of the United States’ economy has been up, reaching higher peaks through each Business Cycle over time.


Peak
Peak occurs when Gross Domestic Product (GDP), the country’s output of goods and services, reaches its highest level during a business cycle.


Recession

Recession, also known as Contraction, occurs when GDP falls for a significant period of time during a business cycle.

Recession is characterized by:
• decreasing demand for goods and services (decreasing GDP)
• decreasing employment (increasing unemployment)
• decreasing revenues and profits for businesses
• decreasing consumer income
• decreasing availability of credit for businesses and consumers
• decreasing capital investment by businesses and consumers
• decreasing stock market value


During a recession, when inflation is lessening (sometimes to the point of deflation) and the economy is “cooling,” fiscal and monetary policy aim to stimulate and heat up the economy.

Fiscal Policy
decreases taxes
increases government spending

Monetary Policy
lowers interest rates
buys government bonds
increases money supply

Fiscal and Monetary Effects on Currency
weakens value of the dollar —> increases exports (products sold to other countries)

The Great Recession of 2008-2009 was a particularly deep recession.

The Great Depression of 1929-1941 was an even more severe recession, whose great depth and duration earned it the moniker of “depression.”


Trough
Trough occurs when GDP reaches its lowest level during a business cycle.


Expansion
Expansion, also known as Recovery, occurs when GDP rises for a significant period of time during a business cycle.

Expansion is characterized by:
• increasing demand for goods and services (increasing GDP)
• increasing employment (decreasing unemployment)
• increasing revenue and profits for businesses
• increasing consumer income
• increasing availability of credit for businesses and consumers
• increasing capital investment by businesses and consumers
• increasing stock market value


During an expansion, when inflation is on the rise and economic activity is “overheating,” fiscal and monetary policy aim to dampen and cool off the economy.

Fiscal Policy
increases taxes
reduces government spending

Monetary Policy
increases interest rates
sells government bonds
decreases money supply

Fiscal and Monetary Effects on Currency
strengthens value of the dollar —> decreases exports


Practice – Questions
greatdepressionunemployment
1.  Based on the above graph, the unemployment rate during the Great Depression got as high as:
A.  5.00%
B.  10.00%
C.  15.00%
D.  > 20.00%

greatdepressionmoneysupply2. Based on the above graph, from approximately 1929 t0 1933, M2:
A.  stayed the same
B.  disappeared
C.  decreased
D.  increased

greatrecessionunemployment
3.  Based on the above graph, the unemployment rate during the Great Recession approached:
A.  5.00%
B.  10.00%
C.  15.00%
D.  > 20.00%

greatrecessionmoneysupply
4.  Based on the above graph, from approximately 2008 to 2009, Velocity of M2:
A.  stayed the same
B.  disappeared
C.  decreased
D.  increased

5.  M2 is a broad measure of money supply, including cash, checking deposits, savings deposits, money market funds, and other readily available funds.  Velocity of M2, also called the Velocity of Money, is another measure of money supply that correlates with the speed by which money is circulating in the economy.  During a recession and/or a depression, Monetary Policy is supposed to increase the money supply to bolster the economy.  Based on the graphs in Question 2 and Question 4, what can you infer?
A.  Monetary Policy succeeded in increasing the money supply adequately.
B.  Monetary Policy did its job.
C.  Monetary Policy has a nice ring to it.
D.  Monetary Policy failed to increase the money supply adequately.


Practice – Answers
1.  D.  > 20.00%

2.  C.  decreased

3.  B.  10.00%

4.  C.  decreased

5.  D.  Monetary Policy failed to increase the money supply adequately.

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