The Business And Market Cycle Essay

The Business And Market Cycle Essay

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The Answer to Question 1:
According to what is said in Macroeconomics, the business/market cycle is comprised of a series of short-term alternations between the upturns and downturns in an economy. When an economy is booming it is considered to be at an expansionary, or recovery, period. During an expansionary period, employment and production will increase. However, when an economy is considered to be deteriorating, it is called a contraction, or a recession. During a recessionary period, employment and production significantly decrease. The period between a recession and a recovery period (going from a recession to a recovery period) is identified as a business cycle trough. The period in which an economy goes from an expansionary period to a contractionary period is identified as a business cycle peak. [1]

The Answer to Question 2:
According to Austrian Economics, the primary causes of an economic boom are the decreases in the interest rates followed by a large increase in credit creation. During a booming period, banks are offering a large quantity of loans, while businesses are taking advantage of the lowered interest rates by heavily investing in capital. Businesses quickly begin to invest in malinvests and overproduce assuming that they have enough capital to produce their goods. In addition, the businesses think that consumers are actively purchasing and consuming their goods at the same rate that they are producing the goods. [2] Due to the boom in capital goods, and the increase in production, consumers are tricked into thinking that they have increased incomes. The consumers continuously purchase goods using loans and credit, with the belief that their future incomes will cover the expenses. Banks begin to realize th...

... middle of paper ... solution to prevent another downturn would be for the government to proactively plan and put into effect well-timed fiscal and monetary policies. The government should slowly begin to raise the interest rate and slightly alter the money supply (i.e. do anything to slim down future excessive activities from banks and firms). This should, hopefully, cause banks to slow down their credit creation and stop any firm from overproducing or investing in bad projects. If a bank or firm begins to fail, I don’t think they should be helped, unless they are absolutely needed to prevent a further downfall in the economy. This should decrease the incentive for banks and firms to purposely fail because they’ll know they won’t be bailed out by the government. I believe the government should learn from its mistakes, expect past events to occur again, and to effectively plan ahead.

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