Reading 17 Understanding Business Cycles Introduction
Agricultural societies experience good harvest times and bad ones. Weather is a main factor that influences crop production, but other factors, such as plant and animal diseases, also influence the harvest. Modern diversified economies are less influenced by weather and diseases but, as with crops, there are fluctuations in economic output, with good times and bad times.
This reading addresses changes in economic activity and factors that affect it. Some of the factors that influence short-term economic movements—such as changes in population, technology, and capital—are the same as those that affect long-term sustainable economic growth. Other factors, such as money supply and inflation, are more specific to short-term economic fluctuations.
This reading is organized as follows. Section 2 describes the business cycle and its phases. The typical behaviors of businesses and households in different phases and transitions between phases are described. Section 3 provides an introduction to business cycle theory, in particular how different economic schools of thought interpret the business cycle and their recommendations with respect to it. Section 4 introduces basic concepts concerning unemployment and inflation, two measures of short-term economic activity that are important to economic policymakers. Section 5 discusses variables that demonstrate predictable relationships with the economy, focusing on variables whose movements have value in predicting the future course of the economy. A summary and practice problems conclude the reading.
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