The Business Cycle and Goals for the Economy
3/14/2016 Jacob Reed
A primary focus of Macroeconomics is the business cycle. When we have a boom, times are good, but an economy that grows too fast can have high inflation. A stagnant economy, on the other hand, has little or no inflation (unless there is stagflation), but unemployment rises.
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.