Question

3. Over the last twenty years, the U.S. economy has experienced its ups and downs, good times and bad times. Using the last twenty years as an example, answer the following questions:

1. Using the last twenty years of economic activity, identify the four stages of the business cycle, citing the periods the U.S. economy went through each stage.

2. Explain how the levels of unemployment, prices, GDP and industrial production changed with each stage of the business cycle. You can use actual data.

3. What were the responses from the Federal Reserve (Monetary Policy) and the Federal Government (Fiscal Policy) over the last twenty years.

Answer 1

Four stages of business cycle are expansion, peak, contraction and trough.

As can be seen from the data the economy was growing substantially in 2004,2005. GDP growth was 4%, CPI inflation growth was stable as compared to the GDP, Unemployment rate was stable.

The economy was at its peak in 2004 and 2005

Following that there was a contraction in GDP growth rate and it hit -3% in 2009, Inflation was 0%, there was no demand, Unemployment rate was highest in recent years at 9.3. Industrial production also bottomed out.

The lowest point is the trough after which the economy again went into expansion mode in 2010. After that there have been no major cycles, The peak has been in 2015 and 2018 with respect to the GDP growth.

The Federal reserve and the federal policy have intervened with regards to inflation management and stimulus packages, it intervened in 2008 with a stimulus package to sell bonds and take that money to fund investments in the long run and pump in that money. The federal policy kept interest rates in check to help control inflation and decreased the rates whenever there was high inflation.