Chapter 31 business cycles
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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 31 Business cycles

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Chapter 31 business cycles

Chapter 31Business 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

The business cycle:short-term fluctuations of total output around its trend path

Trend output grows steadily as productive potential increases.

Actual output fluctuates

around this trend.

A – slump

B – recovery phase

has begun

C

Actual

output

E

D

C – Boom

Trend output

D – recession under way

E – slump again

B

A

Output

Time


Uk growth of real gdp 1952 2006

UK: growth of real GDP1952-2006

Source: Economic Trends Annual Supplement


The political business cycle

The political business cycle

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.


Theories of the business cycle

Theories of the business cycle

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.


Fluctuations in stock building

Fluctuations in stock-building

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.


Real business cycles

Real business cycles

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.


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