economic fluctuations new

8/12/2019 Economic Fluctuations New

1/31

ECONOMIC FLUCTUATIONS:

THE BUSINESS CYCLE


2/31

3/19/2014

Business Cycle

A central concern of macroeconomics is the upswings and downswings inthe level of real output or economic fluctuations called the business cycle.

There are expansions and contractions

Aggregate economic activity declines in a contractionor recessionuntil it reachesa trough

Then activity increases in an expansionor boomuntil it reaches apeak

A particularly severe recession is called a depression

The sequence from one peak to the next, or from one trough to the next, is a

business cyclePeaks and troughs are turning points


3/31

3/19/2014


4/31

3/19/2014


5/31

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2000-I 2002-I 2004-I

recession

Expansion

Peak

Trough

A Complete Business Cycle consists of an expansion and a contraction


6/31

3/19/2014

The business cycle is recurrent, but notperiodic

Recurrent means the pattern ofcontraction-trough-expansion-peakoccursagain and again

Not being periodic means that it doesn'toccur at regular, predictable intervals


7/31

Business cycle is the fluctuation in the level of economicactivity alternating between periods of depression andboom conditions. It is the economic conditionalternating between periods of economic growth andcontraction.

Business cycles are innate to market economies.

Business cycle


8/31

Key indicator of cycles is the rise

and fall in real GDP, whichmirrors changes in employment

and the price levels.


9/31

Peak or boom

Recession

Trough

Recovery

Four Phases of Business

Cycle


10/31

3/19/2014

peak- a phase where business activities are in their temporary maximum.

the economy at this phase is at full employment and the level of output is

at its full capacity

recession- a phase in business cycle that is characterized by a decline in

total output , income and employment.

trough/depression- it is the turning point of recession or when economic

activity is at its lowest. (unemployment is so severe)

recovery- in this phase, there is a recovery in the economy wherein

income, output, interest rate, wage and employment are rising.


11/31

FISCAL POLICY


12/31

Fiscal policy is the use of governmentspending and taxes to influence the nationsspending, employment and price level.(Tucker 2008 p.527)

It is the manipulation of the nationalgovernment budget to attain price stability,

relatively full employment, and a satisfactoryrate of economic growth (Slavin 2005 p. 275)


13/31

Fiscal policy is reflected through the governmentsspending, taxation, and borrowing policies. It is one of themajor tools that government utilizes in order to helppromote the goals of full employment, price stability, andrapid economic growth.

When the supply of money is constant, governmentexpenditures must be financed with either: (1) taxes andother revenues derived from the sale of services (i.e fees

and charges) or assets (such as privatization ofgovernment owned and controlled corporations andselling of government assets) or (2)) borrowings (eitherdomestic or foreign)


14/31

3/19/2014

When government revenue from taxes is equal togovernment expenditure, the government has

achieved a balanced budget.

budget deficit- total government spending exceeds

total government revenue

budget surplus- government revenue's exceed its

total expenditure


15/31

3/19/2014

Changes in the size of the deficitorsurplusare often usedto gauge whether fiscal policy is stimulating or restrainingdemand.

Changes in the size of the budget deficit orsurplus may arise from either:

1. A change in the state of the economy, or,

2. A change in discretionary fiscal policy.

The natinal budget is the primary tool of fiscal policy.

Discretionary changes infiscal policy: deliberatechanges in government spending and/or taxes designed toaffect the size of the budget deficit or surplus.


16/31

Keynesian view to fiscal policy

Government budget should be used

to promote a level of aggregate

demand consistent with full

employment rate of output


17/31

3/19/2014

When an economy is operating below itspotential output, the Keynesian modelsuggests that the government should instituteexpansionary fiscal policy,by:

increasing the governments purchasesof goods & services, and/or,

cutting taxes.

expansionary policiesGovernment policy actions that lead toincreases in aggregate demand.


18/31

3/19/2014

When inflation is a potential problem,Keynesian analysis suggests a shift toward amore contractionaryfiscal policy by:

reducing government spending, and/or,raising taxes.

contractionary policiesGovernment policy actions that leadto decreases in aggregate demand.


19/31

MONETARY POLICY


20/31

Monetary policy is a macroeconomicpolicy which involves the regulation ofthe money supply, credit and interestrates in order to control the level ofspending in the economy.

It is the measure or action undertaken by

central banks to influence the generalprice level and the level of liquidity in theeconomy.


21/31

During the 1950s and 1960s, most Keynesianargued that monetary policy could be used to

control inflation, but that was often ineffectiveas a means of stimulating aggregate demand. Itwas popular to draw an analogy betweenmonetary policy and the workings of a string.

Like a string, monetary policy could be used topull ( hold back) price increases and therebycontrol. However, just as one cannot push witha string, according to this popular view,

monetary policy could not be used to push(stimulate) aggregate demand.


22/31

Money supply

increases

Interest rate falls

Investment increases

Aggregate demand

increases

Aggregate outputincreases by the increase

in investment

Price level rises

Expansionary Monetary

Policy

Problem: Recession andUnemployment

Measures:1.Central bank buys

securities through

open market

operations

2.CB lowers bank rate.


23/31

Refers to a monetary policy

setting that intends to increasethe level of which could alsoresult in a relatively higher

inflation path for the economy.

Expansionary monetary policy


24/31

Is a monetary policy setting thatintends to decrease the level of

liquidity/money supply in theeconomy and which could also resultin a relatively lower inflation path

for the economy.

Contractionary monetary

policy


25/31

Money supply decreases

Interest rate rises

Investment decreases

Aggregate demand

declines

Aggregate output decrease

by the decrease in investment

Price level fallss

Restrictive or Tight

Monetary Policy

Problem: Inflation

Measures:

1.Central bank sellssecurities through

open market

operations

2.It rises bank rate.


26/31

Economists define money supply (Ms) as anything that

is generally accepted as payment for goods or services

or in the repayment of debts (Mishkin, 2003)

The term money is also being used to describe income

It may also refer to generally accepted in payment for

goods and services or in repayment of debts anddistinct from income and wealth.

What is Money Supply (Ms)?


27/31

1.As a medium of exchange

2.As a unit of account3.As a store of value

Functions of Money


28/31

1. M1 or Narrow Money- consists of currency incirculation (or currency outside depositorycorporations) and peso demand deposits.

2. M2 or Broad Money- consists of M1 plus peso

savings and time deposits.3. M3 or Broad Money Liabilities- consists of M2 pluspeso deposit substitutes, such as promissory notesand commercial papers

4. M4- consists of M3 plus transferrable and otherdeposits in foreign currency.

Measuring Money Supply (Ms)

F Whi h I h


29/31

1. A reduction in the interest rate.2. A rise in the demand for consumer spending.3. A rise in uncertainty about the future and future

opportunities.4. A rise in transaction costs to buy and sell stocks

and bonds.5. A rise in inflation causes a rise in the nominal

money demand but real money demand staysconstant.

Factors Which Increases the

Demand for Money


30/31

6. A rise in the demand for a countrys goodabroad.

7. A rise in the demand fro domestic

investment by foreigners.8. 8. A rise in the belief of the future value of

the currency.

9. A rise in the demand for a currency bycentral banks (both domestic and foreign).


31/31

economic fluctuations new

Documents