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Published byCoral Priscilla Townsend Modified over 9 years ago
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THE BUSINESS CYCLE N.P.
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The Business Cycle It is a permanent characteristic of market economies: GDP (Gross Domestic Product = PIL) fluctuates as booms and recession follow each other. N.P.
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The Business Cycle Boom: an economy expands, it is working at full capacity, therefore production, employment, prices, profits, investments and interests rates all tend to rise. Recession: the demand for goods and services declines: investments, production, employment, profits commodity and share prices, and interest rates generally fall. A long-lasting recession is called a depression or a slump. N.P.
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The Business Cycle Peak: highest point on a business cycle, which is generally followed by a downturn/downswing, i.e. a period of contraction. Trough: the lowest point on a business cycle, which is generally followed by a recovery, or upturn/upswing, i.e. a period of expansion. N.P.
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Theories for the Business Cycle Internal/Endogenous theories: they consider it to be self-generating and indefinitely repeating. A peak is reached when people begin to consume less, for whatever reason. In the 19th century people were believed to ‘infect’ one another with optimistic or pessimistic expectations. N.P.
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Theories for the Business Cycle - When economic times are good and people feel confident about the future, they spend more and run up debts. - However, if interests rates run too high, people find themselves paying more than they anticipated and so they have to consume less. N.P. - If they are worried about the possibility to lose their jobs, they tend to save more.
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Theories for the Business Cycle External/Exogenous theories: they look for causes outside economic activity, e.g.: scientific advances, natural disasters, elections or political shocks, demographic changes, etc. J. Schumpeter: the business cycle is caused by major technological inventions, which lead to periods of ‘creative destruction’. N.P.
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Theories for the Business Cycle Simpler Theory: when there is no independent central bank, the business cycle is caused by governments beginning their period of office with a couple of years of austerity programmes, followed by tax cuts and monetary expansion in the two years before the elections. N.P.
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The Business Cycle Discussion: Which theory for the business cycle do you find more convincing? Why? N.P.
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