Business cycle (Essay Sample)

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General Overview: Brief overview and identification of the business cycle you will be analyzing The economy may linger in one phase for a long period of time and it may as well not remain static or within the same pattern for long. It is due to such changes that business cycles are employed as parameters to express the countless themes that the economy in any region could have faced. A number of these cycles entails cycles of growth, where GDP in a nation is growing, and in others contraction is being witnessed while the economy appears to be stagnant. These business cycles are picked out by the duration in which the identified theme persists along with other diverse market drivers. Since business cycles are periodic in nature, they have been presented in four major categories, namely: Kitchin inventory cycle which runs 3-5 years; Kondratev wave or as is known long technological cycle estimated to be 45-60 years; Juglar fixed investment or the business cycle runs for 7-11 years, while Kuznets infrastructural investment cycle ranges between 15-25 years this cycle is also referred to as building cycle (Friedman 24). In essence business cycles are more of diverse fluctuations seen in the aggregate economic doings of nations that tend to structure their activities in business enterprises. There various factors that determine the nature of any give business cycle, in essence, they are recurrent but not expressly periodic. Thus, the scope of business cycles is consistently determined by either market consumption or production.
Analysis of causes of recession (aggregate demand and aggregate supply influences)
Examining the wider dimensions of business cycles, in this study we would analyze the 9/11 Recession: (March 2001 - November 2001). This particular recession is considerably allied to the terror attack which had engulfed the country. The complete cycle of the recession was 8 months and it contributed to the overall GDP decline with 0.3 while the labor magnitude established the rate of unemployment to be stationed within the rate of 5.5%. The definite reasons behind the recession are attributed to the unexpected collapse of the fledging dotcom bubble as well as the 9/11 attacks including countless series of bookkeeping scandals almost in all leading US corporations and this contributed to this moderate contraction evidenced in the US economy. However, within the subsequent months, the GDP began to recover. Other factors attributed to this recession include but not least to Y2K jolt, which as a resulted generated a boom as well as subsequent bust as regards online and internet commercial activities. As a result, various financial indicators established that the economy basically contracted in two simultaneous quarters, which is Q1:-1.3% [-.5%] as well as Q3-1.1% [-1.4%]. Such instances had equal effect on employment since it caused the rate of unemployment to surge, it ought to be noted in this scenario that unemployment is a lagging indicator.
Causes of the recession
Analyzing the causes of a recession, various factors have been brought into consideration so as to avoid creating inconsistencies in the data evaluated. As compared to other years, the 2001 recession can be said to be one of its kind. Using Kitchin inventory cycle which runs 3-5 years, the recession is more linked to what is termed as pro cyclical as well as coincident, during this period, both investments as well as consumptions were identified to be greatly pro cyclical as to make the investment appear to be highly sensitive than the prevailing consumption to the existing business cycle (Davis et al 45).
Examining the historical context of recession witnessed in 2001, it is evident that the recession was as a result of irrational enthusiasm associated with high tech. Numerous studies have shown that in 1999 the US economy experienced massive boom due to computer as well as software sales due to Y2K scare. Numerous organizations as well individuals were compelled to purchase new computers along with software’s to avoid any backlash. The rash was to make all computers to be compliant and thus manage to differentiate 2000 from 1900. As a consequence, the stock prices of many of the high tech organizations gained and increase tremendously. Eventually many investors poured their money into these organizations without evaluating if they were profitable or not. The enthusiasm of dot com bubble evolved to be irrational. Looking back at 2000, it had become evident that computer demands would decline since majority has a lifespan of two years, and majority of organizations had just acquired the equipments they required. Eventually, this resulted in what was perceived as stock market sell off, that is back in march 2000. By 2001 the stock prices had started to plummet, so did the anticipated value of the dot.com organizations, in addition a good number of them went bankrupt.
Using aggregate demand as well as aggregate supply to illustrate this phenomenon, it can be construed that technological advancement as well as monetary policies are foremost forces that in the long run control the economy. What this indicates is that technological progress tends to shift LRA supply towards right, while Fed amplifies funds supply and this rises AD. The outcome is growth in productivity along with long-term inflation (augment in the price level).
The United States experienced a downturn in 2001 where joblessness rose from 3.9% in December 2000 to 6.3% as of June 2003.The slump has been ascribed to three aggregate demand shocks. They entail the dot-com effervesce in the stock market came to an ended. While, the radical assault in September 2001 led to increased insecurity. Third, quite a lot of commercial accounting outrages were exposed. As a result, the federal government approved tax cuts to advance consumer spending, whereas the Fed countered by keeping interest rates low. The effect of this recession sank the US economy ending a 10 years growth and the longest expansion ever on record in the US. Other associated factors that contributed to the recession include high interest rates. In regard to 2001 recession they restricted liquidity making the amount of funds available to the investors to be limited. Likewise despite such challenges the FED moved on in raising the interest rates to a ceiling of high 6.5 in last quarter of 2000,this was partially interrupted in January 2001,the Federal Reserve lowered the rates with a margin of ½ point each consecutive month and the eventually the rates stood at insignificant 1.75 % by December 2001. The process confined the rates and they remained high and it was at this time the economy was in need of low rates so as to facilitate low and cheap business loans including mortgages. Since GDP is the preeminent measure of any economic activity, prior to November 2001, the US GDP had remained low this was attributed low productivity growth. The subsequent issues included falling employment rates and an increasing labor force. Thus, the aggregate economic activities were equally low. Since the GDP is not constant, it eventually changes due to diverse circumstances, both economic and non economic; recession becomes essential in understanding where the economy is coming from and where it is headed (Sichel 228). Thus, what appears to be reduction in unemployment was reflected in actual output gap, that is, the economic growth as compared with the intensity of potential output was actually low. Due to such changes, the wider scope of GDP was captured as having a lower rate which fuelled the wider margin of unemployment. Thus, 2001 recession witnessed a phase where the rate of production was restricted by high lending rates, and an increase in unemployment in the US.
Evaluate the fiscal and monetary policies that were used to address the state of economy.
Recession forms a defining aspect of a business cycle. Without recession no aspect of economy can be adequately addressed. However, examining the scope of the US economy in 2001 we note that the government actually handles all spheres allied to economic activities. This is intended to maintain progressive levels of actual employment including stable prices. The US government in relation to the recession opted to employ fiscal policies in which it established the appropriate levels regarding taxes as well as spending; monetary policies were as well introduced to control the manner in which the funds were supplied. However, as compared to previous recessions, the government appears to have been employing the combination of both, fiscal and monetary policies. During this period the government opted to implemented fiscal policies which were designed to smooth out the economy. Some of these transformations rested on changes in taxes which forms the overall fiscal strategies (Hamilton 370). One of the fiscal policies employed was to use the government funds in stimulating diverse economic activities while in recession through the increment of expenditures while at the same time decreasing the taxes. And this is what is commonly referred to as Keynesian economics, what it entails is the government reducing spending while increasing the taxes as a measure to balance the economy. For years the US government has been operating on deficit, when in 2001, its economy was in the verge of recession after terrorist attacks, the government expenditure grew and this saw the return of government deficits. The other measure employed to contain the recession was monetary policy, the government controlled the funds in circulation and this resulted in higher rates. It ought to be noted that the ratio rested at 1.75 % by November 2001 after the government through Federal Reserve failed to contain the rates which were high making the funds circulation to be limit. In this the government went against the traditional ...