Untitled

Macro Economics: Business Cycles

• The study guide addresses the topic of business cycles.
• It offers strategies for understanding business cycles.
• The subject matter is assessed in a step-by-step approach.
• Consolidation activities are included.
• The explanations and activities supplement classwork and textbooks; they don't replace them.
• Activities progress from simple to complex, requiring application of knowledge to current issues.

Study Tips

• Allocate sufficient time for careful reading and underlining key concepts and data
• Underline key concepts in questions
• Practice drawing graphs related to business cycles
• Attempt activities independently before referring to answers
• Compare answers with suggestions and correct in a different color to discover weaknesses
• Refer to past examination papers, as repetitive practice is valuable.

Outcome of Studying Business Cycles

• Allows analysis and explanation of business cycles and their use in forecasting
• Gives knowledge of business cycle types and economic events over a few years
• Helps individuals, investors, and the government make informed decisions.

Business Cycle Key Concepts

• Business Cycle: Successive periods of increasing and decreasing economic activity with a recurrent pattern repeating every three to five years
• Recovery: GDP begins to increase after contraction and a trough until real GDP reaches its long-run potential
• Prosperity: Increased output and excessive economic activities with a positive economic growth rate
• Expansion: The period between the trough and peak, including recovery and prosperity
• Recession: Negative economic growth for at least two successive quarters or a decline in economic activity lasting a few months
• Depression: Continuous decrease in production output and economic activities
• Contraction: The period between the peak and trough, including recession and depression
• Peak: The highest point between the end of an economic expansion and the start of contraction
• Boom: The period immediately before and through the upper turning point
• Trough: The lowest point between the end of economic contraction and the start of expansion
• Real Business Cycle: Actual cycle after removing effects of irregular events, seasons, and long-term growth trend

How to Draw a Business Cycle Diagram

• Show a complete wave-like pattern with two periods and two turning points.
• Step 1: Draw axes with a vertical line representing economic activities and a horizontal line representing time
• Step 2: Draw a trend line from the left point to the right of the graph
• Step 3: Draw a wave-like pattern illustrating four phases and turning points around the trend line

Characteristics of Business Cycle Phases

• Recovery: Improvement in economic activity immediately after a trough
  • Increased production output
  • Decreasing unemployment
  • Rising consumer confidence
  • Increased employment leading to rising income
  • Economy considered in recovery until real GDP returns to its long-run potential level
• Prosperity: Businesses and consumers gain confidence
  • A sustained increase in the production process
  • Highest employment levels
  • Rising wages and salaries
  • Increased spending
  • Rising demand for goods and services causing a rise in inflation
• Recession: Negative economic growth for at least two successive quarters occurs immediately after the peak
  • High prices of goods and services discourage consumer demand
  • Decreased production output due to high interest rates
  • Declining demand for credit
  • Increased unemployment
  • Decline in economic activity and growth
• Depression: Continuous decrease in production output and economic activity
  • Shutdown of most economic activities
  • Negative impact on investment spending
  • Evident sustained decline in economic growth
  • Extremely high unemploymen
  • Most businesses go bankrupt and down scale or clos
  • Drastic decline in luxury consumer goods and services

More Key Concepts

• Boom: The period immediately before and through the upper turning point
• Peak: The highest turning point of the business cycle
  • Goods and services' highest output level.
  • Maximum employment level.
  • High demand causes a price hike
  • Prices increasing leads to inflation
• Trough: The lowest point of the business cycle at the end of the contraction period
  • Income at its lowest and high job losses.
  • Low levels of investments by firms.
  • Households put most of their savings towards necessities.
• Expansion Periods: Recovery consists of the recovery and prosperity phases
  • Upswing in economic activities from trough to peak.
  • Upward sustained growth in economic activities leads to an increase in GDP
  • Economy experiences sustained growth
• Contraction Periods: Consists of recession and depression phase
  • Downswing from peak to trough.
  • Rapid decrease in production activities.
  • Decreased employment and GDP.

Dynamics of the South African Business Cycle

• Depression (Latter Stages of Downswing):
  • Depressed business sentiment
  • Low demand for credit
  • Low interest rates
  • Surplus on current account
  • Depressed property market
  • Rising share prices culminating in a trough
• Prosperity (Latter Stages of Upswing):
  • High production capacity
  • Higher demand and prices for capital goods
  • Increasing inflation
  • Deficit on the current account
  • Reduced share prices
  • High demand for credit
  • Rising interest rates and property prices, culminating in a peak
• Trigger or Activate: Export increase due to overseas demand or a rise in the gold price.
• Recovery (Early Stages of Upswing):
  • Growing exports
  • Increased manufacturing production
  • Decreasing inventories
  • Falling interest rates
  • Depreciating Rand
  • Decreasing inflation
  • Current account is still in a surplus
• Recession (Early Stages of Downswing):
  • Rand depreciates
  • Inflation increases
  • Interest rates increase
  • High property prices
  • Large increase in inventories
  • Manufacturing production falls rapidly
  • Surplus on the current account
  • Decreasing demand for credit

More Key Concepts

• Real/Actual Business Cycle: Obtained when effects of irregular events (like COVID-19), seasons, and long-term growth trends are removed from time series data
• Real Business Cycles: Have periods of increasing and decreasing economic activity within business cycles

composite leading business cycle indicator

• Intends to foresee changes in the direction of economic activity.
• Composite leading indicator has a strong history of shifting direction before changes in the business cycle.
• Turning points in the indicator have occurred 7 months before business cycle troughs on average, and 13 months before business cycle peaks since 1960.

Explanations/Causes of Business cycles

• Exogenous Factors: Factors outside the market system that Impacts the supply and demand that cause business cycles
• Endogenous Factors: Factors originating within the market system that cause business cycles
• Monetarist Approach: Control money supply which directly influences inflation
• Keynesian approach: The economy is best controlled manipulation of supply and goods
• Exogenous/Monetarist: Originate from outside the free market system/economy
• External: Forces causes expansions and contractions
• Examples of external forces: Natural disasters, technological innovation, COVID-19
• Endogenous/Keynesian: Originate from within the market systems/economy
• Internal forces: within the market causes expansions and contractions

Types of Different Business Cycles

• Kitchin Cycle: 3-5 years
  • Occurs when businesses adapt their inventory levels
  • Shortest business cycle
• Juglar Cycle: 7-11 years
  • It's caused by large investments of businesses and government
• Kuznets Cycle: 15-25 years
  • Building and construction industry changes initiate it
  • Building cycles
• Kondratieff Cycle: At least over 50 years
  • Technological innovation, wars, construction of new roads and discovery of new deposits cause cycles

Government policy Key Concepts

• Monetary Policy: Influence the money supply to influence economic activity
• Expansionary Monetary Policy: Helps accelerate the economy by cutting rates
• contractionary monetary policy: Helps to slow down a growing economy by increasing the money supply in economy
• Repurchase Rate (Repo Rate): The interest rate that the Central bank charges financial bank
• Prime Lending Rate: Interest rate that commercial banks charge customers for credit
• Fiscal Policy: raise money(taxation) and spend money(expenditure) of the government.
• Expansionary Fiscal Payments: increase spending and decreasing tax
• Contradictory monetary policy: decrease government expenditure and increase taxes
• *Taxes: Compulsory payments made by businesses
• Government Expenditure: consumption of an investment of transfer payments Inflation: increase good's price
• Economic growth: Produced increase quantity of economy

Government can use monetary and fiscal policies to smooth out the business cycle"

• Theories need government to peak and through to prevent inflation unemployement.
• Government to stabilize supply to balance supply and demand to grow in the economy.
• Monetary and fiscal growth focus on aggregate demand side.
• Demand created by businesses, households
• Demand won't create price inflation
• Inflation develops in economy bottlenecks by skill, labor e.g.

Demand policy Graph

• Output quantity increase when demand increase Q1 increase Q2,

###Unemployment Graph The demand for labour will economic growth, and that leads to reduced

• A decrease in unemployment results in more more money
• There is an graph relationsship

Phillips Curve

the Phillips curve shows the inverse relationship between rates of unemployment and corresponding rates of inflation in an economy • Stated simply, as unemployment decreases in an economy, inflation increases. • The PC curve shows the initial situation. A is the point of intersection of the PC curve with the x-axis. It shows the natural rate of unemployment, which is 14% in the graph above. • This is the rate of unemployment that causes no pressure on wages and has no inflationary effects - inflation is at 0%. supply and demand the curve. Effective training Migration of skilled labor. The curve shifts to the left (PCI), the natural level of unemployment

Supply-side policies

• The supply-side policies focus on aggregate supply of the producers
• The tax for capital capacity.
• Infrastructure-the government can supply transport