Chp' 8: Business Cycles

1
Chp. 8 Business Cycles

• Focus
• What is business cycle?
• Characteristics of Business Cycles
• Stylized facts about business cycles

2

• Business cycle refers to fluctuations in
  aggregate economic activity.
• Characteristics of Business Cycle
• Recurrent but not periodic
• Persistent
• Co-movement A number of variables move together.

3

• Variables which move in the same direction as the
  aggregate economic activity are called
  procyclical. Example- Industrial Production,
  Consumption, Investment, Trade Balance,
  Employment, Average Labor Productivity Inflation,
  Nominal Interest Rate
• Variables which move in the opposite direction
  to the aggregate economic activity are called
  countercyclical. Example- Unemployment Rate
• Variables which do not show any pattern over
  business cycle are called acyclical. Example-
  Real Wage, Real Interest Rate

4

• Variables which move in advance of aggregate
  economic activity are called leading variables.
  Example Inventory Investment, Trade Balance,
  Money Growth, Average Labor Productivity, Stock
  Prices
• Variables which move after the aggregate
  economic activity are called lagging variables.
  Example Inflation, Nominal Interest Rate
• Variables which move at the same time as the
  aggregate variables are called coincident
  variables. Example Consumption, Unemployment,
  Employment

5
AD-AS Model

• AD (Aggregate Demand) curve relates price level
  (P) to aggregate demand. It is downward sloping.
• AS (Aggregate Supply) curve relates price level
  (P) to aggregate supply.
• Long Run AS curve is vertical at full employment
  level of output.
• Short Run AS curve is horizontal implying that
  in the short-run price is fixed (Keynesian
  notion).