Macroeconomics
resourcesmaybeclosetofullyutilized,and inflationarypressures couldbegintoemerge(↑AD → price level). ● Recession or Downturn: A recession follows the peak and is characterized by a signifcant decline in economic activity . During a recession, production, employment, and spending decrease . Unemployment rates rise, and consumer confdencedeclines.Recessionsareoften defned as two consecutive quarters of negative economic growth (GDP contraction). ● Depression: Adepressionisan extendedandsevereformofrecession ,markedbyaprolonged period of economic decline. Depressions are rare and have widespread negative effects on employment, income, and overall economic well-being. ● Trough: Thetroughisthe lowestpointofeconomicdecline ,markingtheendofarecessionor depression. It represents the turning point from economic contraction to expansion. Business cycles are inherent to market economies and are influenced byarangeoffactors,including changes in consumer spending, investment, government policies, technological advancements, and global economic conditions. While cycles can vary indurationandintensity,theirpredictablepatterns have led to attempts to manage their effects through various fscal and monetary policies. How is the business cycle used to understand economic indicators and guide policy decisions? 1. EconomicIndicators: Keyeconomicindicators,suchasGDPgrowth,unemploymentrates,and consumer spending, provide insights into the current phase of the business cycle and guide economic forecasts and policy decisions. 2. Economic Policies: During periods of expansion, policymakers mayimplementcontractionary measures such as higher interest rates to control inflation. Conversely, during recessions, expansionary policies like lower interest rates and increased government spending may be employed to stimulate economic activity. C. Multiplier and Crowding-Out Efects Definition of Multiplier Efect
Wenowunderstandthatchangesinthecomponentsofaggregatedemand (C + I + G + [X − M]) impact GDP since it is calculated using the same componentsundertheexpenditureapproach.Buthowdoweknowbyhow much GDP changes following a change in spending? Imaginethatafactorypaid$2milliontoacquirenewmachinerytoincrease production. New workers were also hired to operate the new machinery. Whenthefactorypaysitsworkers,theyhavemoreincometospendinthe local economy. These workers, in turn, spend their money at local businesses like restaurants, shops, and grocery stores. As these local businessesseeincreasedsales,theyneedtohiremoreemployeestokeep
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