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7/31/2019 5.Bussiness Cycle
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7/31/2019 5.Bussiness Cycle
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BUSINESS CYCLES:Business cycles are the short-run fluctuations
in aggregate economic activity around its long-
run growth path.Components of a Business Cycle:
Peak,
Contraction or Recession, Trough, and
Recovery and Expansion.
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Stages of the business cycle: Peak:
The maximum level that aggregate economic
activity reaches.
Contractions, Recessions, or Hard Landing:
2 or more consecutive quarters of declining real GDP.
period of significant decline in total output, income,
employment, and trade, usually lasting from 6 months to a year, and
marked by widespread contractions in many sectors ofthe economy
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Stagescontd Actual growth rate is less than natural growth rate, resulting
in a rising unemployment rate.
Depression:
A recession that is major in both scale and duration
The minimum level that aggregate economic
activity reaches.
Recovery :
A period of significant increase in total output,
income, employment, and trade,
usually lasting 6 months or more, and
marked by widespread expansion in many sectors of economy
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Features of a business cycle: Main features of a business cycle:
Pervasive in nature,
Recurrent but not periodic,
Persistent,
Each cycle differs in length and severity.
Expansions are longer than recessions.
Business cycles are fluctuations in aggregate economic
activity, not fluctuations in a specific economic variable
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Business cycles are persistent:
Declines in aggregate economic activity are followed by
further declines; growth in aggregate economic activity is
followed by more growth.
Business cycle are recurrent:
The pattern ofcontractiontroughexpansionpeak
occurs over and over again.
Business cycles are not periodic:
Business cycles do not occur at regular, predictableintervals.
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Macro- economic variables and
business cycles: The behavior of economic variables:
Direction:
What is the direction of a variables movementrelative to aggregate economic activity?
Pro-cyclical: moves in the same direction.
Countercyclical: moves in the opposite direction.
Acyclical: moves with no clear pattern.
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Timing:
What is the timing of a variable's movements relative to aggregate economic activity?
Leading: moves in advance.
Coincident: moves at the same time.
Lagging: moves afterwards
Leading indicators have been used to predictpeaks andtroughs of the business cycle.
Generally, several leading variables are combined into
an index of leading economic indicators.
A decline in the index for 3 to 6 months warns of arecession
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The cyclical behavior of key macro
variables:
Leading: residential investment, inventory
investment,
average labor productivity, money growth, stock
prices. Coincident: industrial production, consumption,
business fixed investment, employment.
Lagging: inflation, nominal interest rates.
Timing not designated: government purchases, real
wages
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variable Direction timing
production
Industrial production Pro-cyclical coincident
expenditure
Consumption Pro-cyclical coincident
Business investment Pro-cyclical coincident
Residential investment Pro-cyclical leading
Inventory Investment Pro-cyclical leading
Government purchases Pro-cyclical
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Labour market direction timing
Employment Pro-cyclical Coincident
Unemployment Countercyclical unclassified
Average labor productivity Pro-cyclical leading
Real wages Pro-cyclical (mildly)
Money marketMoney supply Pro-cyclical leading
inflation Pro-cyclical lagging
Financial variables
Stock Pro-cyclical leading
Interest rates Pro-cyclical lagging
Real interest acyclical
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Multiplier & Accelerator: The shape of the business cycle depends on the
interaction between the accelerator and the multiplier.
If there is an initial injection, multiplier action will start,
which will cause output to increase and hence through
the accelerator, the investment will increase and setoff
another chain of multiplier reaction.
If, however, the full employment level is reached andoutput cannot increase any further, the investment does
not take place and the ceiling is reached.