What Causes the Business Cycle?

Business Cycle

The business cycle describes the phases of growth and decline in an economy. The goal of economic policy is to keep the economy in a healthy growth rate – fast enough to create jobs for everyone who wants one, but slow enough to avoid inflation. Unfortunately, life is not so simple. Many factors can cause an economy to be out of control, or settle into depression. The most important, over-riding factor (определяющий) is confidence of investors, consumers, businesses and politicians. The economy grows when there is confidence in the future and in policymakers, and does the opposite when confidence drops.

There are four stages that describe the business cycle. At any point in time you are in one of these stages:

1. Contraction - When the economy starts slowing down.

2. Trough - When the economy hits bottom, usually in a recession.

3. Expansion - When the economy starts growing again.

4. Peak - When the economy is in a state of exuberance (изобилие)

What Causes the Business Cycle?

The business cycle is affected by all the forces of supply and demand. When consumers are confident, they buy now knowing there will be income in the future from better jobs, higher homes values and increasing stock prices. Even a little healthy inflation can trigger demand by spurring shoppers to buy now before prices go up. As demand increases, businesses hire new workers, which further stimulates more demand. This is the Expansion phase.

If demand outstrips supply, then the economy can overheat. It's still the Expansion phase, but if demand isn't cooled down with higher taxes (fiscal policy) or higher interest rates (monetary policy), then the Peak is not far off.

In the Contraction phase, confidence is replaced by fear or even panic. Consumers sell their homes, and stop buying. Businesses lay off workers, and hoard cash. In addition to demand, the business cycle is also heavily dependent on the availability of capital. This is known as liquidity, and is itself dependent upon interest rates. A trough usually is accompanied by a recession and a bear market, while an expansion is usually signaled by a bull market and inflation.

Дата добавления: 2015-07-10