Introduction In general the economy tends to experience different trends. These trends can be grouped as the business/trade cycle and may contain a boom, recession, depression and recovery. A business/trade cycle (see figure 1) is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real Gross Domestic Product (GDP) and other macroeconomic variables. Samuelson and Nordhaus (1998), defined it as ‘a swing in total national input, income and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy’. These fluctuations in economic activity usually have implications on employment, consumption, business confidence, investment and output. Theories and the nature and causes of business cycle fluctuations The Keynesian Approach This theory shows how the collaboration of multiplier and accelerator can lead to regular cycles in aggregate demand. The Keynesians believe that economic activity is generally unstable and is subject to inconsistent shocks, usually causing the economic fluctuations and are attributed to the changes in autonomous expenditures especially investment. The Keynesian approach is pretty simple; higher investment will lead to a larger rise in income and output in the short run. This means that consumers will spend some of their income on consumption goods. This will give rise to further increase in expenditure. Ceteris paribus an initial rise in autonomous investment produces a more than proportionate rise in income. The rise in income will increase investment to meet the increase demand for output. The Keynesian also points out that as the economy is inconsistently unstable there is the need for government to intercede to make the economy stable when necessary. The Monetarist Approach This approach was developed by M. Friedman and A. J. Schwartz in their classic study A Monetary History of the United States, 1867-1960 (1963). The monetarist approach acclaims economic instability to fluctuations in the money supply swayed by the authorities. In such a situation the economy will return moderately back to the normal level of output and employment. They made it clear that the changes in the rate of monetary growth give rise to short term fluctuations in output and employment. Therefore in the long run, the trend rate of monetary growth only cause movements in the price level and other normal variables. They also attributed business cycle to the expansion and contraction of money and credit. Their views were that monetary factors are the primary source of fluctuations in aggregate demand.
In conclusion, regardless of Macropoland’s current economic condition, it is fair to say that it is all part of the business cycle. The business cycle has three parts: peak, trough, and peak. The peak is the date that the recession starts. In Macropoland’s case, the peak would be at the beginning of 1973, its trough somewhere between 1973 and 1974, and then its peak again at 1974. In the second scenario, Macropoland is either at its trough, where it is about to head up again because of its low inflation rate, or it is at its expansion, on its way to heading to its next peak.
In Keynesianism, government uses fiscal policy, which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high, and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the amount of income that goes to financial responsibilities. When people have more money, they are able to spend more, which in return goes into jump starting the economy.
The economic business cycle of the world is its own living and breathing entity expanding and contracting with imprecise balances involving supply and demand. The expansions and contractions also known as booms and recessions support a delicate equilibrium of checks and balances, employment and unemployment. The year 1929 marked the beginning of the downward spiral of this delicate economic balance known as The Great Depression of the United States of America. The Great Depression is by far the most significant economic event that occurred during the twentieth century making other depressions pale in comparison. As a result, it placed the world’s political and economic systems into a complete loss of credibility. What transforms an ordinary recession or business cycle into an authentic depression is a matter of dispute, which caused trepidation among economic theorists. Some claim the depression was the result of an extraordinary succession of errors in monetary procedure. Historians stress structural factors such as massive bank failures and the stock market crash; economists hold responsible monetary factors such as the Federal Reserve’s actions when they contracted the currency distribution, and Britain's attempt to return their Gold Standard to pre-World War parities. Subsequently, there are the theorists such as the monetarists, who presume that it began as a normal recession, however many policy errors by the monetary establishment forced a reduction in the money supply, which worsened the economic condition, thereby turning the normal recession into the Great Depression. Others speculate that it was a failure of the free market or a failure of the government in their efforts to regulate interest rates, slow the occ...
Gustman, A. L., Steinmeier, T. L., & Tabatabai, N. (2012). How Did The Recession Of
We feel that the latter is on the radical side of thinking, and that overall the Federal Reserve has the best interest of the nation and international economy in all their decisions regarding the increases in interest rates, etc. Since the onset of the Federal Reserve, we have not gone into a major depression, and over the course of time there will be times when our economy will peak and boom and the Fed will feel that it is time to slow the economy by raising the rates. Bibliography FED 101 Hosted by the Federal Reserve Bank of Kansas City. http://www.kc.frb.org/fed101 Friedman, Milton and Jacobson Schwartz, Anna. A Monetary History of the United States, 1867-1960.
The state of the economy is important both on a micro and macroeconomic level. On a macro level, those in government pay close attention to these statistics in order to guide fiscal and monetary policy. On a micro level, households can use this data to guide their consumption and investments, while businesses can use this information in their strategic planning. In looking at economic information, there is current data, historical data, and economic forecasts. This enables decision makers to get a more complete picture of economic trends and see the relationship between various economic indicators.
Keynes and Hayek each approach the economy from a different perspective. In Keynes’ estimation, it is all about the flow of money. The economy is improving when money is moving, and thus, stability is achieved as much as is possible. Consequently, spending, and more specifically government spending, is the key to unlock the door blocking economic growth. By contrast, Hayek contends that money is not everything. What the money is used for, whether it be saved, invested, loaned, or spent, also plays an important role in the progression of the economy. Growth comes from saving and investing not consumption and spending. The stability of the economy, according to Hayek, is brought about by the forces of supply and demand.
Unstable economy – Economy changes constantly. Changes in interest rates, inflation and unemployment rates affect the demand of the product;
Over the past five years the Australian economy has gone through many changes experiencing both the peaks and troughs associated with business cycle.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
Keynesian Economics was developed and founding by John Maynard Keynes. He believed and wrote in his book “The General Theory of Employment, Interest and Money” that it is essential for the Government to play a vital role in economic stability. Keynesian theorist believe Government spending, tax hikes or tax breaks are vital in economic success. Keynesian assumptions include: Rigid or Inflexible Prices, Effective Demand, and Savings-Investment Determinants. Rigid or Inflexible Prices suggest that wages increases are easier to take while wage decreases hits resistance; likewise, a producer will increase prices yet when needed will be reluctant to decrease prices.
Many countries in the world have been suffering a recession in their economies and UK has not been an exception. A recession is a macroeconomic term describing one of the two business cycles that economies go through. The business cycles is characterized by either a boom where there are more business activities carried with a rapid economic growth and points of recession where there is retardation min economic growth. Various aspects and factors contribute to economic growth, which is measured through GDP. This factor may include savings, investments government spending plus other factors within either an increase or a decrease. Reduction in spending may lead to a recession while a n increase in spending may lead to expansion that is a boom in the economy.
Keynesian economists, similar to Classical economists, also believe that the economy is made up of consumer spending, government spending, and business investments. However, the Keynesian Theory says government spending can improve economic growth in the absence of consumer spending and business investment (Differences). According to the Keynesian theory, wages and prices are not flexible. A static price will give a horizontal aggregate supply curve in the short run (Classical and Keynesian Economics).
=== A study of economics in terms of whole systems especially with reference to general levels of output and income and to the interrelations among sectors of the economy is called macroeconomics. Macroeconomics is concerned with the behavior of the economy as a whole—with booms and recessions, the economy’s total output of goods and services and the growth of output, the rates of inflation and unemployment, the balance of payments, and exchange rates. Macroeconomics deals with the increase in output and employment over long period of time—that is economic growth—and with the short-run fluctuations that constitutes the business cycle. Macroeconomics focuses on the economic behavior and policies that effect consumption and investment, trade balance, the determinants of changes in wages and prices, monetary and fiscal policies, the money stock, the federal budget, interest rates, and national debt. In brief, macroeconomics deals with the major economic issues and problems of the day.
The disparities between the two views of the economy lead to very different policies that have produced contradictory results. The Keynesian theory presents the rational of structuralism as the basis of economic decisions and provides support for government involvement to maintain high levels of employment. The argument runs that people make decisions based on their environments and when investment falls due to structural change, the economy suffers from a recession. The government must act against this movement and increase the level of employment by fiscal injections and training of the labour force. In fact, the government should itself increase hiring in crown corporations. In contrast the Neoliberal theory attributes the self-interest of individuals as the determinant of the level of employment.