Question

1.    

- Summarize Prof. Romerâ??s discussion of the business cycle.

- Where do you think we are in terms of the description of the business cycle?

- Bonus. Has Prof. Romer said or written anything about our current situation?

Answer 1

Business cycle or a trade cycle is a macroeconomic concept which indicates the rise and fall of GDP in a market economy. In general a business cycle consists of four major stages. The expansionary stage, where the production rises and interest rate lowers; Crisis stage, where multiple crisis occurs in the economy; Recession stage, where the price drops and interest rate rises and the Recovery stage, where the economy comes back to the expansionary stage.

Prof.Christina D Romer talks about this business cycle with respect to the American economy. The analysis states that the recession declined only less from pre World War 1 era to post World War 2 era. The paper also suggests that the recession frequency has fallen over times owing to the macroeconomic policy that has been adopted across the globe in the post World War 2 era. He says that countercyclical monetary policies have helped the economies in post war expansions and prevented many depressions. He also says that one of the major cause that led to the great depression was a decline in the money supply. He talks about the concept of ‘cycle’ and states that it is a misleading concept as many of the macroeconomic trends of an economy follows an irregular trend and it is unable to predict the trend according to a cyclical analysis. Booms can be generated by increased spending, and recessions can be caused by the reverse. Thus according to Romer, monetary and fiscal policies are capable of inducing booms and recessions in the economy

                                    In accordance with the business cycle definitions we can see that the current economy is following the path that is leading to recession. With the advent of global pandemic in the current world, the world economy has seen an evident downfall which is expected to hit the economy in a very bad manner. Thus with the crisis stage slowly moving in to a recession, it contains all the elements that have been discussed by Romer and predicted earlier. Thus we can say that the current economic trend is predictable in accordance with Romer’s analysis of the business cycle.