Assignment 4 - Business Cycles 1 Business Cycles Stacy...

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      Business Cycles 1 Business Cycles Stacy Adams ECO 550 Strayer University Saad Khalil December 05, 2010
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      Business Cycles 2 Business Cycles and Monopolistic Competition The US economy, along with the world economy has been going through its worst recession since the Great Depression. The recession that started in December 2007 is in its 21 st month now, and still going strong. The second quarter GDP numbers that were released earlier in August seemed to suggest some hope of stabilization and an eventual end of the recession. The following table presents some of the salient features of the economy during the last six months: Month Unemployment Rate Consumer Price Index Inflation Rate Real GDP Growth January 7.6 211.143 0.3 -9.7 February 8.1 212.193 0.4 -1.1 March 8.5 212.709 -0.1 -4.3 April 8.9 213.240 0.0 0.8 May 9.4 213.856 0.1 0.9 June 9.5 215.693 0.7 -3.3 Table 1: Select US Economic Indicators, 2009 (U.S.Economic Accounts, 2010) As can be seen from the table the unemployment rate has been consistently rising during the period, and it has seen the total number of unemployed rise by about 3 million people! That is a substantial number by any standards. This has had an impact on businesses of all types, particularly financial services and retail. The period has seen some big firms go out of business. The GDP shrank by 6.4 percent in the first quarter of 2009, and again shrank by 1 percent in the
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      Business Cycles 3 second quarter. Most economists attribute the smaller fall in the second quarter to the increased fiscal spending by the US government (Consumer Price Index, 2010). The general perception is the economy has seen the worst, and anything that will follow will be better than what we have seen so far. In a recent statement Ben Bernanke, Chairman, Federal Reserve, said that there is a good chance that the economy could grow soon, but that the recovery will be slow owing to the high unemployment rate (Money, 2009). This is a sentiment shared by most businesses and the stock markets have responded in true nature: most stock indices are up about 50 percent since March. The general vibe is a positive one. The next step is to look at how this influences the behavior of firms in general. The state of the economy has a major impact on the profitability and sustainability of firms across the board, including those engage in monopolistic competition. To see if they have any special features that make them more prone to such changes we need to examine the central tenets that describe what monopolistic competition means. We say that there is monopolistic competition when there are a big number of firms,
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Assignment 4 - Business Cycles 1 Business Cycles Stacy...

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