Business Cycles – 11sPrepared by LJ, 07.03.15

Ampl

itude

Inde

x of

eco

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ic a

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ty

Time

Peak

Trough

Recession

Prosperity

RecoveryDepression

Peak

Trough

Trend

Line

Review, Grade 11s:

Boom

Slump

Policies used by Governments to smooth out Business CyclesStimulate Private Sector Demand (putting more money in people’s pockets)1. Decrease Taxation2. Increase Government Spending3. Increased Government Spending and Simultaneous Decrease TaxationReduce Private Sector Demand (putting less money in people’s pockets)4. Increase Taxation5. Reduce Government Spending.6. Reduced Government Spending and Simultaneous Increase Taxation

Monetarist vs Keynesian Approaches to Business Cycles

Monetarist (Exogenous) Keynesian (Interventionist)

Markets are stable Market are unstable

Departures from equilibrium are caused by factors outside the market.Demand and Supply restore the market to its equilibrium.

Level of economic activity always above or below its potential.Price mechanism does not sufficiently co-ordinate demand and supply.

Government should not intervene in the market.

Governments should intervene to smooth out fluctuations.

Trend line = natural growth of the economy. Business Cycles are part and parcel of the

economy.Causes of fluctuations:X 5: see handout.

Causes of fluctuations: x 3: see handout.

Leading, Lagging and Co-inciding Indicators – see handout• Nothing to add.

Length, Amplitude, Trend, Extrapolation, Moving Average.• Length: One complete cycle is from peak to peak, or, from trough to

trough.• Amplitude: Vertical distance between trough and the following peak.• Trend: Movement in general direction of the economy.• Extrapolation: Use of past data to make future predictions about the

business cycle.• Moving average: the “ironing out” of minor fluctuations to determine

the long term trend.