Question

Discuss economic cycles, explain how these cycles happen, how government policy influences the cycles, explain an asset bubble of your choice, and analyze fiscal and monetary policy during the time of such bubble. YOU MAY NOT CHOOSE THE 2007 BUBBLE

Answer 1

The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak, contraction, and trough.

During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases, and inflationary pressures build. The peak of a cycle is reached when growth hits its maximum rate. Peak growth typically creates some imbalances in the economy that need to be corrected. This correction occurs through a period of contraction when growth slows, employment falls, and prices stagnate. The trough of the cycle is reached when the economy hits a low point and growth begins to recover.

KEY TAKEAWAYS

• Economic cycle refers to the overall state of the economy going through four stages in a cyclical pattern.
• Economic cycles are a major focus of economic research and policy, but the exact causes of a cycle are highly debated among the different schools of economics.
• Insight into economic cycles can be very useful for businesses and investors.

The National Bureau of Economic Research (NBER) is the definitive source of setting official dates for U.S. economic cycles. Measured primarily by changes in the gross domestic product (GDP), NBER measures the length of economic cycles from trough to trough or peak to peak. From the 1950s to the present day, U.S. economic cycles have lasted about five and a half years on average. However, there is wide variation in the length of cycles, ranging from just 18 months during the peak-to-peak cycle in 1981-1982, up to the current record-long expansion that began in 2009.