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Business cycles

Long run trend of US
Up sloping; yet interrupted by periods of economic instability
Business cycles
-Alternating rises and declines in the level of economic activity, sometimes over several years
-Individual cycles vary substantially in duration and intensity
-Are not regular more fluctuations than cycles
Peak
-Phase of business cycle
-Business activity has reached a temporary maximum
-Economy is near or at full employment and the level of real output is at or very close to the economy’s full capacity
-Price level is likely to increase
Recession
-Phase of business cycle
-Decline in total output, income, and employment
-Lasts six months or more
-Widespread contraction of business activity in many sectors of the economy
-Declines in real GDP, and significant decrease in unemployment
Trough
-Phase of business cycle
-During recession or depression, output and unemployment bottom out at their lowest levels
-Might be short-lived or quite long
Expansion
-Phase of business cycle
-Is usually followed by a recession then recovery
-Real GDP, income, and employment rise
-At some time, the economy again reaches full employment
-Inflation will occur if spending expands more rapidly than production capacity; prices of nearly all goods and services will rise
Phases of business cycles
-Business cycles all pass through same phases, they vary in length and intensity
Fluctuations of business cycles (output and unemployment ) are driven by
shock- unexpected events that individuals and firms may have trouble adjusting to- and sticky prices
Irregular innovation
-Source of shock that cause business cycles
-Big inventions leads the economy to slow down or possibly decline
-Innovations occur irregularly and unexpectedly
Productivity changes
-Source of shock that cause business cycles
-When productivity unexpectedly increases the economy booms and vice versa
Monetary factors
-Source of shock that cause business cycles
-More money than necessary= inflationary boom
-Less money= an output decline, then price-level fall
Political events
-Source of shock that cause business cycles
-Can create economic opportunities or strains
Financial instability
-Source of shock that cause business cycles
-Unexpected financial bubbles or bursts can spill over to general public
Who suffers during recession
Industries that produce capital goods and consumer durables normally suffer greater output and employment declines than do service and nondurable consumer goods industries
Problems that arise with business cycles
Unemployment and inflation

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