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ECONOMIC FLUCTUATIONS, UNEMPLOYMENT AND INFLATION Is there a Business Cycle? Economists and non-economists have long debated whether there is a business cycle. It all depends on what is meant by the term. If business cycle is defined as increases and decreases in business activity with fixed amplitude and length that occur regularly in the economy during fixed intervals, then the answer is no, there is no business cycle. In other words, business activity does have its ups and downs, but some ups are higher than others and some downs are lover than others. Furthermore, there is no fixed length to the cycle. Example: In the 1960s we went for nearly the entire decade without a recession but had back to back recessions in 1980 and 1981. If we define business cycle as alternating increases and decreases in the level of business activity of varying amplitude and length, then there is definitely a business cycle. What goes up will eventually come down and what goes down will rise again. PEAKS AND TROUGHS At the end of economic expansion, business activity reaches a peak. In the months following the peak, the economy goes into a decline, known as a recession. Not all economic declines turn out to be recessions. Most economists believes that a recession has occur when business activity have to recline for two consecutive quarter - 6 months. 1) At the end of economic expansion = Peak 2) The decline that sets in after the peak = Recession 3) A recession ends = Trough Occasionally there is a false recovery when business activity turns upward for a few months but then turns down again. If the next low point is the lowest since the previous peak, then that is the trough. 4) Recovery begins at the trough, but only if the expansion eventually reaches the level of the previous peak. Occasionally business activity rises without reading the previous peak, unless it does, it does not qualify as a recovery. 5) When the recovery go and posses the level of the previous peak, then we enter the new phase of the cycle – prosperity. Prosperity does not mean there is full employment or that we are approaching it. As long as Real GDP or production is higher than it was during the previous peak, we are in the prosperity phase. Prosperity is the 2 nd part of the economist expansion and is accompanied by rising products, falling, unemployment and often accelerating inflation. 6) Sooner or later after a prosperity, we reach a peak and the process repeat itself. - A 2 nd phase cycle would consist of contraction (recession) and expansion (recovery and prosperity) lumped together. - A 4 th phase would be depression. Although rare, depressions can occur (1930s) A recession could turn into a depression. Depression: An unemployment rate of 20%.
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BUSINESS CYCLE THEORIES We have stated that business cycles are inevitable; what goes up must come down and what goes down must come back up. Although economists generally agree that there are business cycles they have many competing theories of their causes.
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This note was uploaded on 01/28/2011 for the course ECON 1 taught by Professor Sm during the Spring '10 term at Laney College.

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