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The business (or economic) cycle is made up of four phases: expansion, peak, recession, and trough.
Expansion is the normal state of an economy, which is characterized by increasing GDP, low unemployment, healthy sales which steady growth in wages. An economy is entering the peak period as growth is slowing and inflation is on the rise. When inflation increases faster than the economy expands, it'll start moving into a recession. Economic activity slows during a recession, wages fall, and joblessness increases. Eventually, before the next recession starts, the economy would begin to stabilise and enter the trough phase. Expansions are the rule in a stable economy, with brief and infrequent recessions.
Using the latest economic data, it's easy to realize that we are in the business cycle expansion process. The latest debate is not in which phase we are in but in which expansion we are in. To find the solution we have to look at historical market cycles first. After the 1990s, the duration of growth cycles has gradually increased and some analysts also wondered whether that would lead to the end of the business cycle as we knew. In 2007, when the US plunged into the worst recession since the Great Depression, expectations of a (mostly) continuous expansion were dashed.
The recession was known as the Great Depression, and the economic cycle proved alive and well, but that doesn't mean that expansions don't change. Expansions are prolonging, and by March our latest extension will be the 3rd longest in US history. Our current expansion is not only a long expansion but also much slower than average. We have seen an average GDP growth of just 2.1% since 2009, while previous expansions have seen growth of close to 3%. Slow growth has balanced this economy and kept inflation at bay, but it has also left investors feeling less than happy about their returns.
Not only has a long, gradual expansion been rough on creditors, it's also made it impossible to determine exactly where the US is in the new expansion. Full employment is viewed as an sign that an economy is entering a late expansion period. If an economy is at full employment, businesses may fail to expand because they are unable to find skilled labor. Current unemployment rates have been below 5 per cent for the past 6 months, according to the Bureau of Labor Statistics. This is slightly below the 50-year average of 6.2 percent and still just over 5 percent below the widely recognized full-time work rate.
It is difficult to assess where an economy is in the business cycle, and much harder to date the economic cycle. Since our economy has been rising gradually through the whole expansion, many investors do not believe the economy is as strong as it is in shape. Trying to time the market to look for better returns is enticing. The long slow growth has made it difficult to forecast business dynamics, but it isn't all negative. Slow growth prevents the economy from overheating and sustained growth is highly likely to be seen.
It does not suggest, though, that we can not make the same mistake, and assume that recessions are over. The business cycle is alive and well and further cycles of recession and expansion are expected. Holding a diversified allocation planned to last the test of time and perform under all market conditions is important. We take a balanced approach in our investments using stocks from all markets as well as market capitalisation.
Business Cycle What are the four phases of the business cycle? Which phase are we in...
Identify and graph the four phases on the business cycle, a cycle that is illustrating long run economic growth. Explain in detail what is happening in each phase of the cycle. (40 pts - this is a big question, be certain your explanation matches the point value)
1. Describe the phases and key characteristics of business cycles. Then explain where you think we are in the business cycle right now and why. 2. Explain how we measure economic growth and discuss three specific things that government could do to improve economic growth in the long run
7. The business cycle What Is a Business Cycle and How Does It Affect You? The term business cycle, or economic cycle, describes the pattern of expanding and contracting business activity that an economy exhibits over a period of time. In this context, increasing production and consumption are generally referred to as economic growth, and declining production and consumption are usually called economic contraction. What are the phases of a business cycle? Which of the following statements accurately describe the...
1. When the United States imports goods and services from the rest of the world we increase our inflation rate. we receive payments from the rest of the world (+credit). we make payments to the rest of the world (-debit) we decrease our inflation rate. 2. When we export goods to foreign countries, we decrease our inflation rate. we make payments to the rest of the world (-debit) increase our inflation rate. we receive payments from the rest of the...
During the expansion phase of a business cycle: A. employment and output are both at a peak. B. employment and output are both rising. C. employment is falling and output is rising. D. unemployment and output are both rising. E. employment is rising and output is falling. In the following index, which year is likely to be the base period: 1991 = 123.3; 1992 = 145.3; 1993 = 111.4; 1994 = 100; 1995 = 94.3? A. 1991 B. 1992 C....
I) Business cycle (a) Draw AD curve, label x-axis and y-axis (b) What is the relationship between the inflation and output gap in the AS or PC curve both (c) What is the relationship between the inflation and unemployment rate in the AS or PC (d) Use a diagram to illustrate the policy mistake in the 1970s when the U.S. government in the long run and in the short run? Draw the diagram curve both in the long run and...
1. Key facts about economic fluctuations The following graph approximates business cycles in the United States from the first quarter of 1947 to the third quarter of 1951. The vertical blue bar coincides with periods of 6 or more months of declining real gross domestic product (real GDP). 2170 REAL GDP (Billions of dollars) 1770 1947 1948 1950 1 1951 1949 YEAR Source: "Current-dollar and Real GDP," Bureau of Economics Analysis, last modified May 1, 13, accessed May 15, 13,...
Question 42 5 pts Problem 2 a: Referencing the above business cycle graph, which of the following statements is correct? Regions 1, 2, & 3 of the graph represent Contraction, Recession, & Trough phases, respectively. Regions 4, 5, & 6 represent Recovery, Expansion, & Peak phases, respectively. Regions 7,8,& 9 represent the Long-term Growth Trend, Economic Activity, & Time, respectively. Regions 1, 2, & 3 of the graph represent Recession, Contraction, & Trough phases, respectively. Regions 4, 5, & 6...
What do current economic data tell us about the health of the economy? Assess the current health of the U.S. economy by evaluating the key economic indicators that we have looked at in this course. How close is the overall economy to potential GDP and the natural rate of unemployment? The relevant economics statistics include the growth rate of real GDP, the unemployment rate, and the inflation rate at a minimum. You are encouraged to discuss and evaluate other economic...