Business Cycles

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Chapter 10 (Business Cycles)
Business Cycles (business Flucuations)
The ups and downs in economy wide economic activities are called business cycles or busyiness fluctuations. When business fluctuations are positive they are called expansion, the opposite of expansion is contraction which is slow down in the pace of national economic activities. Phases of the business cycle over a several year period

1.A peak is when business activity reaches a temporary maximum with full employment and near capacity output. 2.A recession is a decline in total output; income, employment, and trade lasting six months or more. 3.The trough is the bottom of the recession period.

4.Recovery is when output and employment are expanding toward full employment. Causes of business fluctuations
A.Internal (endogenous) theories
1.Innovation theory
2.Psychological theory
3.Monetary theory
B.External (exogenous) Theories
1.War theory
a.Examples are WW2, the Korean war, and the Vietnam War
2.External shock
a.1973 oil embargo
b.Price Shock
c.Demand Shock
Recent recessions
Non-cyclical fluctuations
1.Seasonal fluctuations that are not related to the business cycle. 2.Long term growth trend is positive and cyclical fluctuations occur around this trend. Unemployment
Types of unemployment
1.Frictional unemployment consists of those searching for jobs or waiting to take jobs soon. 2.Structural unemployment is due to changes in the structure of demand for labor, ex. When certain skills become obsolete or geographic distribution of jobs changes. 3.Cyclical unemployment is caused by the recession phase of the business cycle, which is sometimes called deficient demand unemployment. Definition of full employment

The full employment does not mean zero unemployment.
Full employment (natural rate of unemployment) = frictional unemployment + structural unemployment. The natural rate of unemployment is achieved when...
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