Transcript Keynesian Business Cycles

Why should we know about business
cycles?
History of business cycles provides us with
data which contain clues about the causes of
business cycles.
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Why should we know about business
cycles?
 History of business cycles provides us with data which contain clues about the
causes of business cycles.
 These clues (causes) enable us to predict
the future.
Copyright © 1998 Addison Wesley Longman, Inc.
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Why should we know about business
cycles?
 History of business cycles provides us with data which contain clues about the
causes of business cycles.
 These clues (causes) enable us to predict the future.
 Government might want to learn from the
past to develop a correct mix of policies for
the future.
Copyright © 1998 Addison Wesley Longman, Inc.
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Why should we know about business
cycles?
 History of business cycles provides us with data which contain clues about the
causes of business cycles.
 These clues (causes) enable us to predict the future.
 Government might want to learn from the past to develop a correct mix of
policies for the future.
 Businesses might want to study business
cycles to prepare for their impacts when it
materializes.
Copyright © 1998 Addison Wesley Longman, Inc.
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Why should we know about business
cycles?
• History of business cycles provides us with data which contain clues about the
causes of business cycles.
 These clues (causes) enable us to predict the future.
 Government might want to learn from the past to develop a correct mix of
policies for the future.
 Businesses might want to study business cycles to prepare for their impacts
when it materializes.
 Or, they might want to lobby the
Government to undertake a policy
according to their benefits.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 16-‹#›
Why should we know about business
cycles?
• History of business cycles provides us with data which contain clues about the
causes of business cycles.
 These clues (causes) enable us to predict the future.
 Government might want to learn from the past to develop a correct mix of
policies for the future.
 Businesses might want to study business cycles to prepare for their impacts
when it materializes.
 Or, they might want to lobby the Government to undertake a policy according
to their benefits.
 Managers by studying the behavior of
business cycles could anticipate the
Government policy in the future.
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Business Cycles
Business cycles refer to ups and downs in
the level of economic activity extending
over several years. They are due to
changes in output and employment of the
factors of production.
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Phases of Business Cycles:
 Peak: a temporary Maximum.
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Phases of Business Cycles:
 Peak: a temporary Maximum.
 Recession: A period of decline in output,
employment and income lasting 6 months
or more.
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Phases of Business Cycles:
 Peak: a temporary Maximum.
 Recession: A period of decline in output, employment and income lasting 6
months or more.
 Trough: Where the economy is bottomed
out at its most recent lowest level.
Copyright © 1998 Addison Wesley Longman, Inc.
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Phases of Business Cycles:
 Peak: a temporary Maximum.
 Recession: A period of decline in output, employment and income lasting 6
months or more.
 Trough: Where the economy is bottomed out at its most recent lowest level.
 Recovery (boom) when output and output
expands toward full employment.
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Business Cycles and Inflation,
Historical Facts
Phases of Business Cycles:
 Peak: a temporary Maximum.
 Recession: A period of decline in output, employment and income lasting 6
months or more.
 Trough: Where the economy is bottomed out at its most recent lowest level.
 Recovery (boom) when output and output expands toward full employment.
• The great challenge for a manager is to
find a way of surviving a recession because
it is much easier to ride to expansion tide.
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Cycle Patterns, Impulses,
and Mechanisms
• The business cycle is an irregular and nonrepeating up-and-down movement of
business activity that takes place around a
generally rising trend and that shows great
diversity.
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Percentage change in real GDP
Some Business Cycle Patterns
150
World
War II
100
Booming
1960s
50
Booming
1980s
0
Great
Depression
1937
recession
Postwar
recession
OPEC
recession
1982
recession
1990-1991
recession
–50
1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
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Cycle Patterns, Impulses,
and Mechanisms
• Business Cycle Patterns
• There is no simple explanation for the causes of
the business cycle.
• There is no way of forecasting when the turning
points will come.
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Business Cycles
Recovery(boom)
recession
trough
peak
Long term trend line
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Impulse
• The impulse of the business cycle is a change in
expected future sales and profits.
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Impulse
• The impulse of the business cycle is a change in expected future sales and
profits.
• This changes the level of investment in new
capital.
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Impulse
• Keynes reasoned that news or rumors of future
tax changes, interest rate changes, advances in
technology, global economic and political
events (for example) affect expectations and
investment.
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Impulse
• Keynes reasoned that news or rumors of future tax changes, interest rate
changes, advances in technology, global economic and political events
(for example) affect expectations and investment.
• Referred to as “animal spirits”
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Cycle Mechanism
• A change in animal spirits which causes a
change in investment leads to a cycle
mechanism.
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Cycle Mechanism
• The cycle mechanism has two key elements:
1)
The initial change in investment has a multiplier effect.
• It changes aggregate expenditure, real GDP, and
disposable income
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Aggregate Demand Theories
of the Business Cycle
• Keynesian Cycle Mechanism
• The cycle mechanism has two key elements:
2)
The response of real GDP to a change in aggregate demand.
• If money wages are sticky, a decline in and
investment would reduce aggregate demand which
brings recession.
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