Question

What are the short and long run relationships between business cycles, GDP, unemployment, interest rates, and inflation?

Answer 1

Ans) Business Cycle refers to the phenomenon of cyclical booms and depressions.In a business cycle ,there are wave - like projections or fluctuations in aggregate employment,income ,output and price level..A typical business cycle is generally divided into four phases 1) expansion or prosperity 2) recession 3) contraction or depression or downswing 4) revival or recovery .In the long run we started from Recovery : It is a phase a situation after depression ,it lead to increase in demand ,to meet this increase in demand investment and employment increases .In the early stages of revival phase there is considerable excess or idle capacity in the economy so output increases without proportionate increase in cost but as the time goes on bottlenecks appear with rising costs and plants may have to be expanded..Under these circumstances price rises,profit increases, Business expectations improves invesent is increased and raise the demand for bank loans and lead to credit expansions.Prosperity:- In this phase demand ,output ,employment and income are at a high level.,they tend to raise prices but wages ,salaries,interest rates,rentals,and taxes do not rise in proportion to the rise in price hence inflation increases .and the profit for the business also increases which results in larger investment in fixed capital ,plant,equipment,machinery..The peak or prosperity lead to over full employment and inflationary rise in prices.The seeds of recessions are contained in the in the boom. These are scarcity of Labour ,raw materials leading to rise in the cost of raw materials and rise in the rate of interest due to scarcity of capital and failure of consumption due to rise in prices.

Recession: Recession starts when there is a downward from peak which is of a short period .It further results in the liquidations of bank loans ,and the decline of prices .The long term period of it has slow growth of GDP, ,the interest rate declines and low demand for capital. and rising unemployment in the long period affect there is collapse of confidence and sudden demands for liquidity .

Depression this part of business cycle is the amount of time the recession is in the economy ,it signals decline in economic activity ,three is considerable reduction in employment ,income demand and prices ,low inflation with unemployment that is stagflation is an example..Bank rate falls as business community is not likely to borrow money there is general reduction of output or GDP.This can be short lived or may continue for a considerable time The short term relationships between the above. Variables like GDP,inflation,interest employment is not that prolonged and auto correct itself but long run relationships is more critical and threatening .