Question

. Draw a typical business cycle and identify the four phases of the cycle on your graph. List four macroeconomic variables that are pro-cyclical, and indicate whether each one is a leading, lagging, or coincident indicator.

Answer 1

In business cycle, there are basically phases:

• Trough Period where economy is at its lowest and unemployment is at its highest.
• During expansion phase, GDP is rising which takes employment level with it.
• During the peak period of economic cycle, employment level and GDP level is at its maximum
• In contraction phase, output starts falling which starts raising the unemployment level again.

Procyclical macro economic variables are:

• Fiscal Policies: Leading indicator because change in government spending and tax structure will change real GDP in some time.
• GDP: Coincident Indicator because GDP level changes as phase of business cycle changes and it tends to present the state of the economy.
• Marginal Cost: Marginal cost rises as input cost rises which tends to rise during trough period. It is also a coincident indicator.
• Labor: It is lagging indicator as confirms a pattern in the economy whether there is layoff of workers or mass hiring.