logo image

What can be misleading about the term `business cycle`? Essay

The term “business cycle” refers to the pattern of alternation between expansions (upturns) and recessions (downturns). The term ‘cycle’ implies a regular pattern; the term ‘business cycle’ therefore connotes a regular pattern of expansions and recessions. This is misleading because, in reality, business cycles follow an irregular pattern and better resemble weather fluctuations. No two business cycles are identical. In fact, the duration of business cycles varied from 18 months to 10 years and 8 months.

5. Explain intuitively why the unemployment rate is countercyclical. A countercyclical economic quantity is one which is inversely correlated with the general economic condition. The unemployment rate is countercyclical for it tends to increase during economic slowdowns and decrease during economic expansions. The increase in demand which characterizes economic expansions drives firms to increase employment; on the contrary, the fall in demand characteristic of slowdowns urges firms to lay off workers.

6. Explain why the aggregate demand curve is downward sloping. An aggregate demand curve illustrates the negative relationship between the quantity demanded of aggregate output and the aggregate price level. The curve slopes downward due to two factors, both brought about by a change in the aggregate price level: (1) the wealth effect and (2)

Need essay sample on "What can be misleading about the term `business cycle`?"? We will write a custom essay sample specifically for you for only $ 13.90/page

the interest rate effect. The wealth effect is due to the change in the purchasing power of assets brought about by a change in the aggregate price level.

On a collective note, an increase/decrease in the aggregate price level leads to a loss/gain in consumers’ purchasing power and therefore, a reduction/increase in consumption as a natural reaction. The interest rate effect, however, pertains to the effect in investment (I) and consumer spending (C) from the interest rate increase/decrease brought about by the reduction/growth in the supply of loanable funds. An aggregate price level increase/decrease prompts people to increase/decrease their cash holdings (by borrowing or selling financial assets), thereby reducing/augmenting the available funds for lending.

This reduction/augmentation in the supply of loanable funds drives interest rates up/down, leading to a decrease/increase in investment spending. The upward/downward interest rates movement likewise dampens/stimulates consumer spending as consumers would want to save/dispose more of their income. 7. Give another example of a good or service whose prices are sticky. What factors tend to make its price sticky? Luxury watches are a price-sticky good; their prices are sticky downward.

Luxury watch companies are reluctant to cut prices in the face of a dampened demand from an economic slowdown- preferring cutting output instead. Fairness concerns are a possible factor for their price-stickiness. Possibly out of fairness for former buyers, luxury watchmakers decide not to slash their prices. Second, it is also an effort at protecting the brand image. Lowering their prices would make their watches affordable for a bigger body of clients- endangering the brand’s reputation as a luxury name.

Can’t wait to take that assignment burden offyour shoulders?

Let us know what it is and we will show you how it can be done!
×
Sorry, but copying text is forbidden on this website. If you need this or any other sample, please register

Already on Businessays? Login here

No, thanks. I prefer suffering on my own
Sorry, but copying text is forbidden on this website. If you need this or any other sample register now and get a free access to all papers, carefully proofread and edited by our experts.
Sign in / Sign up
No, thanks. I prefer suffering on my own
Not quite the topic you need?
We would be happy to write it
Join and witness the magic
Service Open At All Times
|
Complete Buyer Protection
|
Plagiarism-Free Writing

Emily from Businessays

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out https://goo.gl/chNgQy

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy