The economic cycle is a fundamental economic understanding of the phases that an economy may experience during certain climates. This can be understood by the basic economic cycle diagram, which shows the different periods combined with a line representing trend growth. Governments ideally wish for uniform growth, close to or on the trend line, this is where the economy is continually expanding and growing at a rate which the government perceives to be sustainable. For example, the UK aim for 2.5% trend growth, however due to the economic cycle we can understand that it rarely stays at one point for a long period of time. When the actual growth line is above trend rate, this is known as a positive output gap and when the actual growth line is below trend, a negative output gap.
A boom period is a period on the economic cycle whereby the curve surpasses trend growth; this represents substantial economic growth and is represented by a peak in the economic cycle. Recessionary periods are stages in the economic cycle when growth falls, this occurs most commonly after a boom period and will lead to the next ‘trough’ in the economic cycle, or bust. Bust is whereby the economy is suffering a low point, they are at their lowest in terms of economic growth, operating much below the trend rate and is seen as a trough in the economic cycle. A recovery can be seen on the economic cycle diagram by the encroachment of actual growth to trend growth, and is therefore where the economy is growing gradually and ‘recovering’ from the bust period they have just suffered. The economy is likely to experience a boom period often in times when supply side policies exceed their time lag and their productivity can be seen. Or perhaps in the short term through a boost in demand side policies, such as a decrease in interest rates to encourage consumer spending, however such demand side policies are short-lived due to the accompanied inflation and therefore are unlikely to be the sole...
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