Question

Business Cycle: Description of model and phases and brief explanation of Policies implemented during the various phases.

Answer 1

Business Cycle Model which is showing the fluctuations in a nation’s real GDP over the period.This model describe the positive changes in real GDP in the long run and short-run output variations.Besides this, which shows the changes in aggregate output and employment over the period.The fluctuations shows through the four phases like Expanision, peak,recession,and trough.which is clearly shown in the diagram attached. In the diagram Positive and Negative output gap is showing means the output gap are the difference between the actual out put andthe potential output.The connecting arroow line shows the business cycle line, if the expanision period business cycle line is above the growth trend and at the time of recession below the growth trend.when the actual output is more than potential output means aggregate output is  growing faster than aggregate supply.this will lead to output at highest level the unemployment rate will go down and less than natural rate of unemployment. Then business cycle attain the peak and enter the recession.Different factors that cause the business cycle fluctuations such as interest rates, the credit cycle and the multiplier effect.

Expanision which means the phase of output increasing. Recession means phase of output decreasing. deep recession called Depression.In the Peak period shows the turning point, in that point output stopped rising and start falling. on the other hand Trough also an another turning point where output stop falling and start increasing.Potential output means the level of output in an economy can achieve when it is producing at full employment, where economy is producing at its potential output, there is exist the natural rate of unemployment.Positive and Negative Output Gap means the economy is producing output gap is more than full employment output; that means positive output gap, then the rate of unemployment is less than the natural rate of unemployment and an economy is operating outside of its Production Possibility Curve.and Vice versa.

Policy Impact in Different phases of Business cycle.

The Business cycle managed by Government through the implimentation of expansionary fiscal policy when they want to end a recession.And use contractionary fiscal policy to keep the economy from overheating or peak phase.Due to this economy again enter recession.On the otherhand, central bank of the country uses expanisionary monetary policy through lowers interest rates to end a contraction or trough.The central bank raises interest rates to manage an expansion by contractionary monetary policy.