Question

It is unfair, but true, that bad things happen. Unfortunately, to attempt to prevent unavoidable bad things can actually make things worse, not better. How might the above ideas be relevant to how society deals with business cycles? 150 words response.

Answer 1

Business cycles are basically the ups and downs of an economy which is termed as expansion and recession respectively. A business cycle has four stages: expansion, peak, contraction amd trough.

. During expansion an economy grows in real terms.

. The cycle reaches its peak when the growth of an economy reaches its maximum output.

. During recession an economy shrinks or contracts. This is because while reaching the peak position the economy faces some imbalances which are to corrected. The correction is experienced at the contraction period.  

. The trough is the point where the economy reaches the lower point of growth.

The business cycle is managed by the government's action or activity. Its most important tool is the fiscal policy. At the time of recession the government follows the expansionary fiscal policy and on the other hand, during the expansion in an economy, the government follows contractionary fiscal policy.

The central banks use the monetary policies. When the cycle reaches its trough the central banks lower the interest rate that is the expansionary monetary policies. When the cycle reaches its peak point, the bank raises the interest rate resulting in the contractionary policies

If the decision by the government or the bank is made wrong according to the prevailing situation, it will effect the economy. It is unfair yet true that bad things happen. Unfortunately, in an attempt to control the prevailing situation sometimes the respective instituion or government may end up spoiling the situation further which would result worse for the economy, not better.