Business Cycle: Presented by

BUSINESS CYCLE
PRESENTED BY :-
ABHISEK TAH (9202184)
ROAD MAP
 What is business cycle ?
 What are the phases in business

cycle ?
 Effects of business cycle
 Measures to control business cycle

DEFINITION
 Business cycle are broadly defined as fluctuations
of “aggregate economic activity” rather than as
fluctuations in a single, specific economic
variable such as real GDP.
 In business cycle , there are wave like

fluctuations in aggregate employment , income ,
output and price level .
 According to Burns and Mitchell , Business cycle

is defined by expansions and contractions
PHASES OF BUSINESS CYCLE
 The dashed line shows the average , or normal growth

path aggregate economy activity and the solid path
shows the rises and fall of economic activity.
 The period of time during which aggregate economy

activity is falling is a contraction or recession.
 A recession occurs if a contraction is severe enough... A

deep trough is called a slump or a depression.
 Contraction (A slowdown in the pace of economic

activity)
 Trough (The lower turning point of a business cycle,

where a contraction turns into an expansion)
 Expansion (A speedup in the pace of economic activity)
 Peak (The upper turning of a business cycle)

Normal
growth
path
contraction
expansion
Effects Of Business Cycle
 Business cycle have both good and bad effects
depending upon whether the economy is passing
through a phase of prosperity and depression.
 In the prosperity phase ,”the real income consumed ,

real income produced and the level of employment are
high”.
 There is general increase in economic activity :

aggregate output, demand, employment and income
are at high level .Prices and profits are rising.
 During recession , profits margins decline further

because costs start rising more than prices. Others
reduce production and try to sell accumulated stocks.
Investment , output , employment , income , demand
and price decline further.
 During depression there is no mass unemployment.

Prices , profits and wages are at their lowest levels.
Demand for goods and services are minimum.
CAUSES OF BUSINESS CYCLES
Internal Factors:-
1. Consumption : When consumer spending increases,
businesses will increase production- causing them to
hire more workers and purchase more materials and
capital goods.
2. Business investment : The purchasing of capital

goods increases the number of jobs in the economy .If
investments increases, the economy will grow, if
investment decreases, the economy will contract.
3. Government activity : The government can influence

the business cycle through fiscal policy (its tax and
spend policies) and monetary policy (its control of the
money supply, largely through the federal reserve).
External factors
1. Inventions and innovation : Major changes in
technology can influence the business cycle. Usually
technological changes move the economy in a positive
direction, but this is not always so.
2. Wars and political events : The impact of such events

on the economy are very fact specific- in other words,
difficult to generalize about.
Measures To Control Business Cycle
1. MONETARY POLICY
Monetary policy as a method to control business
fluctuations is operated by the central bank of a
country.
 To control the expansion of money supply during a

boom , it raises its bank rate ,sells securities in the
open market , raises the reserves ratio.
 To control a recession or depression , the central bank

increases the reserves of commercial banks. It reduces
the bank and interest rate. It lowers margin
requirements on loans and encourages banks to lend to
consumers , businessman ,traders, etc.
2. FISCAL POLICY
Fiscal measures are highly effective for controlling
excessive government expenditure , personal
consumption expenditure , and private and public
investment during a boom.
 The government raises the rates of personal ,

corporate and commodity taxes in order to cut personal
expenditure.
 Government follows the policy of surplus budget when

the government revenues exceed expenditures. This is
done by increasing the tax rates or reduction in
government expenditures or both.

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BUSINESS CYCLE

 What is business cycle ?

 What are the phases in business

 Effects of business cycle

 Measures to control business cycle

 In business cycle , there are wave like

 According to Burns and Mitchell , Business cycle

 The dashed line shows the average , or normal growth

 The period of time during which aggregate economy

 A recession occurs if a contraction is severe enough... A

 Contraction (A slowdown in the pace of economic

 Trough (The lower turning point of a business cycle,

 Expansion (A speedup in the pace of economic activity)

 Peak (The upper turning of a business cycle)

 In the prosperity phase ,”the real income consumed ,

 There is general increase in economic activity :

 During recession , profits margins decline further

 During depression there is no mass unemployment.

2. Business investment : The purchasing of capital

3. Government activity : The government can influence

2. Wars and political events : The impact of such events

 To control the expansion of money supply during a

 To control a recession or depression , the central bank

 The government raises the rates of personal ,

 Government follows the policy of surplus budget when

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