Chapter 31 Business cycles

1. Chapter 31Business cycles David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

2. 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

3. UK: growth of real GDP1952-2006 Source: Economic Trends Annual Supplement

4. 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.

5. 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.

6. 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.

7. 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.