The Business Cycle and Goals for the Economy
1/30/2019 Jacob Reed
A primary focus of Macroeconomics is the business cycle. The business cycle is the natural ups and downs that come with a capitalist economy. Capitalist economies naturally rise and fall through periods of boom and bust.
What are the 4 stages of the business cycle?
When the economy expands, times are good and unemployment is low; but eventually the economy peaks. When the economy peaks, inflation is often high as consumers begin to purchase goods and services at a higher rate than the economy’s ability to produce. This is called an inflationary gap. It drives up prices and results in inflation. The peak is followed by a contraction when the economy slows down and production falls below potential. If the contraction lasts more than 2 consecutive quarters (6 months) it is called a recession. The trough following a recession is the economic low point. It marks the end of the contraction and coincides with a recessionary gap. Unemployment is high and there could even be some deflation.
What are the 3 main goals for the economy?
The main goals of the US economy are also found in the business cycle and when the government gets involved with fiscal policy or monetary policy (technically the Fed is quasi-government) it works to limit the effect of the business cycle and obtain the three macroeconomic goals. The first macroeconomic goal is full employment (4-6% unemployment). An expanding economy is likely to have more jobs and fewer workers unemployed. Unemployment tends to be lowest at the peaks and highest in the troughs. The second macroeconomic goal is stable prices (approximately 2% inflation). Inflation tends to be lowest in the troughs and highest at the peaks. The third and final goal is growth (2-3% real GDP annual increase). In AP macroeconomics growth doesn’t just mean more GDP; it means more potential GDP. So recovering from an economic downturn isn’t enough for growth. The overall trend-line should be upward sloping. True economic growth requires more resources, technology, and/or productivity.