Download Chapter 30: Business Fluctuations

Chapter 30: Business Fluctuations
Introduction
- Business Cycles are alternating periods of ups and downs in the
economy.
Phases of the Cycle
- A business cycle shows four distinct phases:
Peak
Recession
Tough
Expansion
Trough
- A Trough is the lowest point in a business cycle.
- A Depression is a severe trough.
Expansion
- During a Expansion phase, output expands and income
increases.
Peak
- In a Peak phase, real GDP is at its highest level.
Recession
- During the Recession phase, income and consumption decline.
Length and Intensity of Phases
- Business cycles vary in frequency and intensity.
Economic Causes of Business Fluctuations
The Under-Consumption Theory
- Variations in consumer spending cause economic fluctuations.
The Volatile Investment Theory
- Changes in inventory investment cause fluctuations in economic
activity.
- Inventory Cycles are the cycles of low inventory and production
during recession, and high inventory and production during good
economic activity.
The Expectations Theory
- Changes in expectations cause business cycles.
The Innovations Theory
- Innovations are a prime cause of business cycles.
The Monetary Theory
- Changes in the availability of money and interest rates cause
business fluctuations.
The Multiplier-Accelerator Theory
- The Principal of Acceleration suggests that the level of
investment is proportional to the rate of change of output.
- The capital-output ratio is the ratio of the value of capital to total
output. (eg. Its takes $4 worth of capital to produce $1 of output
per year)
- A change in income leads to an accelerated change in
investment.
- Required Investment = v(Change in Total Output)
 K = required capital stock
 Y = Total Output
 K/Y = v
- Multiplier-accelerator interaction intensifies the business cycle.
Politics and the Business Cycle
- The Political business Cycle is caused by the government’s use of
its spending and taxing powers to secure its political future.
The Real Business Cycle
- The Real Business Cycle theory suggest that the main causes of
business cycles are shifts in aggregate supply.
Have we Conquered the Business Cycle
- Through the correct use of stabilization policies, we have
managed to avoid severe depressions.
Forecasting Business Cycles
- Leading Indicators turn downward before the cycle peaks and
upward before the trough.
- Coincidental Indicators coincide exactly with the business cycle.
- Lagging Indicators turn downward after the cycle peaks and
upward after the trough.
- Economists use leading indicators to help them forecast business
cycles.