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Unformatted text preview: ..-CHAPTER 8: BUSINESS CYCLESINTRODUCTIONThis chapter is the first of four that discuss the business cycle.Itdiscusses the facts about business cycles,Chapter 9 then develops a basicIS-LMmodel of the economy, Chapter 10 emphasizes the Mundell-Fleming model of the small open economy, and Chapter 11 examines the Keynesian model of thebusiness cycle.This chapter begins by looking at the basic features of the business cycle in Section 8.1. Section 8.2 thenprovides a brief history of Canadian business cycles. The relationships between major economic variablesare discussed in Section 8.3. Finally, Section 8.4 gives a preview of the economic model that will be usedto analyze the business cycle.CHAPTER OUTLINEtimenormalgrowthpathexpansiontroughIIIIIIIIIIcontractionIpeaktroughIcontractionIexpansionaggregateeconomicactivityf.What Is a Business Cycle? (Sec. 8.1)A.US research on cycles began in 1920 at the National Bureau of Economic Research (NBER)1.NBER maintains the business cycle chronology-a detailed history of business cycles2.NBER sponsors business cycle studiesB.Burns and Mitchell (Measuring Business Cycles, 1946) make five main points about businesscycles:1.Business cycles are fluctuations of aggregate economic activity, not a specific variable2.There are expansions and contractionsa.Aggregateeconomic activitydeclines in acontractionorrecessionuntil itreaches atrough(Fig. 8.1)b.Then activity..increases in anexpansionorboomuntil it reaches apeakc.A particularlysevere recession iscalled adepressiond.The sequence fromone peak to thenext, or from onetrough to the next,is abusiness cycleFigure 8.1e.Peaks and troughsareturning pointsOne goal of business cycle research is to identify when turning points occurI.113114Chapter 83.Economic variables showcomovement-theyhave regular and predictable patterns ofbehaviour over the course of the business cycle4.The business cycle is recurrent, but not periodica.Recurrent means the pattern of contraction-trough-expansion-peak occurs againand againb.Not being periodic means that it does not occur at regular, predictable intervalsThe business cycle is persistenta.Declines are followed by further declines; growth is followed by more growthb.Because of persistence, forecasting turning points is quite importantII.The Canadian Business Cycle: The Historical Record (Sec. 8.2)A.Text Table 8.1 gives the business cycle chronologyB.The Pre-World War I period1.Recessions were common from 1873 to 1914, with 233 months of contraction and 262months of expansion [compared to 572 months of expansion and 109 months ofcontraction from 1945 to 2001]2.The longest contraction on record was 66 months, from November 1873 to May 1879C.The Great Depression and World War II1.The worst economic contraction was the Great Depression of the 1930sa.Real GDP fell by more than 20% from the peak in April 1929 to the trough inMarch 1933b.The unemployment rate rose from 3% to nearly 20%c.Thousands of banks failed, the stock market collapsed, many farmers went...
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This note was uploaded on 10/20/2010 for the course MATH 100 taught by Professor A during the Spring '10 term at Wilfred Laurier University .
- Spring '10