Chapter 31 Business cycles. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward. The business cycle: short-term fluctuations of total output around its trend path.
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Chapter 31Business cycles
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
9th Edition, McGraw-Hill, 2008
PowerPoint presentation by Alex Tackie and Damian Ward
Trend output grows steadily as productive potential increases.
Actual output fluctuates
around this trend.
A – slump
B – recovery phase
C – Boom
D – recession under way
E – slump again
Source: Economic Trends Annual Supplement
Some commentators have suggested that there is a political business cycle
whereby governments adopt tight monetary and fiscal policy soon after an election
but then adopt more expansionary policies as the election approaches to encourage a ‘feel-good’ factor.
The multiplier-accelerator theory:
the multiplier communicates the effects of changing investment to aggregate demand
the accelerator assumes that firms gauge future demand by reference to past output growth
this model can produce fluctuations in output level in response to a shock.
Stockbuilding may also be a cause of fluctuations in output.
Firms tend to use stocks to smooth production in the face of fluctuating demand.
Output per worker tends to rise in times of boom, and fall in times of recession.
In this view of the world, fluctuations in actual output are fluctuations in potential output
… so there is no point in trying to stabilise output over the business cycle.
Although some swings in potential output do occur, many short-run fluctuations are more likely to reflect Keynesian departures from potential output.