The two different views in the business cycle

While the business cycle is a relatively simple concept, there is great debate among economists as to what influences the length and magnitude of the individual parts of the cycle, and whether the government can or should play a role in influencing this process.

It is possible for such external impulses to cause cyclical motions within the system, in much the same way that striking a rocking horse with a stick will cause the horse to rock back and forth.

There were great increases in productivityindustrial production and real per capita product throughout the period from to that included the Long Depression and two other recessions. The occurrence of a time lag—the inevitable delay between every decision to invest and the outcome of that investment—provides a second reason for expecting cyclical fluctuations to occur in any economic process.

The different phases of business cycles are shown in Figure Prices rose more and more rapidly as the U. A table of innovations and long cycles can be seen at: A positively sloped yield curve is often a harbinger of inflationary growth.

Post-Keynesian economist Hyman Minsky has proposed an explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis.

Other theorists suggest that excess speculation or the creation of excess levels of bank capital drive business cycles. In this phase, the growth rate of an economy becomes negative. This relationship, known as the acceleratorimplies that an increase in national income will stimulate investment.

When the decline in the demand of products becomes rapid and steady, the recession phase takes place. Credit cycle and Debt deflation One alternative theory is that the primary cause of economic cycles is due to the credit cycle: The most developed countries are able to invest large amounts of money in the technological innovations and produce new products, thus obtaining a dynamic comparative advantage over developing countries.

Various regions have experienced prolonged depressionsmost dramatically the economic crisis in former Eastern Bloc countries following the end of the Soviet Union in Recent research by Georgiy Revyakin proves initial Vernon theory and shows that economic cycles in developed countries overrun economic cycles in developing countries.

5 Phases of a Business Cycle (With Diagram)

Deviations from cycle patterns Cycles are compounded of many elements. Eventually, the boom cannot be sustained and is followed by a "bust" in which the malinvestments are liquidated sold for less than their original cost and the money supply contracts.

The crisis of led to a wave of financial and industrial bankruptcies; recovery started inwhen iron production ceased to fall, and by a new upswing was under way.Letting Different Views about Business Cycles Compete Paul Beaudry, Bernd Lucke.

Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference or more generally a demand shock.

Old-Fashioned Real Business Cycle. Politically based business cycle.

Letting Different Views about Business Cycles Compete

Another set of models tries to derive the business cycle from political decisions. The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes.

Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of office when inflation becomes unacceptably high. By Stephen Simpson The business cycle is the pattern of expansion, contraction and recovery in the economy.

Business cycle

Generally speaking, the business cycle is measured and tracked in terms of GDP and. business cycle theory explains the business cycle, it is necessary to look into the fundamental forces that change the supplies and demands for various goods and services.

Many sorts of macroeconomic disturbances can in principle generate fluctuations in real business cycle models. Two very different theories of the business cycle. Uncertainties about the future development of the US economy run deep.

There are two opposing views of what has happened to it since the early s, which originate in two very different theories of the business cycle.

Paul de Grauwe, FT 16/7 The first runs as follows.

Macroeconomics: The Business Cycle

The different phases of business cycles are shown in Figure There are basically two important phases in a business cycle that are prosperity and depression. The other phases that are expansion, peak, trough and recovery are intermediary phases.

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The two different views in the business cycle
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