Supply of loanable funds curve to the left Real interest rate increase and investment decreases Tax benefits increase the incentive to save Supply of loanable funds curve to the right Real interest rate decrease and investment increases Expected future profits Demand for loanable funds curve to the right Real interest rate & investment increase Corporate taxes Demand for loanable funds curve to the left Real interest rate and the level of investment to decrease 10.3 The Business Cycle: Fluctuations in real GDP per capita reflect underlying fluctuations in real GDP • Period of expansion ends with a business cycle peak ○ During the expansion phase of the business cycle, production, employment and income are increasing • Recession comes to an end with a business cycle trough ○ Following the business cycle peak, production, employment and income decline as the economy enters the recession phase • Basic Business Cycle Definitions: NBER: a recession is a significant decline in activity spread across the economy, lasting more than a few months visible in industrial production, employment, real income, and wholesale-retail trade ○ Most economists and policymakers accept the decisions of the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) • How Do We Know When the Economy Is in a Recession: Profits of firms will be falling i. Both households and firms will have substantially increased their debts ii. As economy nears the end of an expansion, interest rates are usually rising and the wages of workers are usually increasing faster than prices 1. As spending declines firms that sell capital goods and consumer durables will find their sales declining i. As sales decline firms cut back on production and begin to lay off workers ii. A recession will often begin with a decline in spending by firms on capital goods 2. Interest rates decline, firms increase spending on capital goods i. As recession continues economic conditions eventually begin to improve 3. Must business cycles share the following characteristics • What Happens during the Business Cycle: Long run economic growth depends on the developing of new technologies such as those introduced over the years by firms like Corning • Corning's sales are significantly affected by the business cycle • Corning, Technology & Business Cycle: The inflation rate usually increases during economic expansions and decreases during recessions • Effects of the Business Cycle on the Inflation Rate: Lesson 7 Page 49
recessions The average decline in the inflation rate has been 2.5 percentage points • As firms see their sales decline, they begin to reduce production and lay off workers ○ Recessions cause the inflation rate to fall but they cause the unemployment rate to increase • Even though unemployment begins to increase as a recession ends, it may be increasing more slowly than the increase in the labor resulting from population growth 1.
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