2.2: the business cycle and the level of economic activity

Overview
1. level of economic activity, measured by GDP, fluctuates
  1. creates a wave know as the business cycle
2. Business Cycle - wave like ups and downs in a nations level of production or economic activity.
3. business cycle diagram has two key points.
  1. 1. has swings in production levels & 2. long term trend line for national input.
Short to medium term cyclical swings in economic activity
1. level of economic activity is always changing
2. repeated once completed
3. Main phases of the business cycle
  1. 4 main phases
    1. 1. Expansion or recovery phase
      1. starts at lower levels, than there is an expansion in economic activity
      2. slow at first but picks up later
      3. employment grows, unemployment falls and inflation increases
    2. 2. The peak (sometimes a boom) phase
      1. period of expansion where economic activity reaches its peak
      2. unemployment is low, inflation high
      3. peak occurs then we are at productive capacity and a boom may result
      4. growth rates tail off and may not be fast
      5. Boom - period of strong spending and above average levels of economic activity, usually associated with rapid demand inflation and very low unemployment.
    3. 3. The slowdown or contraction phase
      1. normally follow a peak or boom
      2. growth in GDP slows. Sever production may fall
      3. unemployment rises and inflation eases
    4. 4. The trough (sometimes recession) phase
      1. lowest point on cycle
      2. slight rise in unemployment
      3. Enter text here
      4. GDP falls twice we go into a recession where inflation is negative
      5. Long and severe troughs are known as depression.
        Depressions- large economic downturn in production associated with very high cyclical unemployment and is caused by significant fall in aggregate demand
      6. Recession- period of weak spending and is associated with high levels of cyclical unemployment
The 'ideal' level of economic activity
1. ideal at domestic economic stability
2. Domestic Economic Activity - desirable level of economic activity where there is low inflation, a solid and sustainable rate of GDP and low unemployment
  1. midway b/w extremes of peaks and troughs
    1. point on trend line
3. not too rapid or too slow
4. Aus gov uses aggregate demand (AD) management to steer the level of economic activity towards the ideal situation
Special situation of 'stagflation'
1. Stagflation - period of slow GDP growth along with high unemployment and rapid inflation
2. experiences a stagnant (no activity) level of production or activity combined with high costs and inflation and structural unemployment
Long term trend line or sustainable speed limit for economic activity
1. rises in economic activity outweighs the falls
2. average trend lines slopes upwards
  1. trend lines represents a nations average sustainable rate of economic growth that could be achieved. Taken into account is the limited production, the volume of resources and efficient use of resources
3. steeper trend line shows that a countries productive capacity, enabling economic activity to rise and cause serious inflation
4. Productive Capacity - potential level of national production of goods and services dictated by the quantity and efficiency of a nations resources. Determines the sustainable rate of economic growth in the long term

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2.2: the business cycle and the level of economic activity

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