Business Cycle in Economics

The importance of the economic cycle in examining and understanding the economy helps economists and other investors to make informed business decisions. The business cycle in economics occurs in four distinct stages that include the expansion, peak, contraction, and trough. A significant characteristic to note about the business cycle is that each phase occurs singly and independently, but defined by identifiable and notable signals. The existence of the economic cycle is explained by the theories of the business cycle in different countries. A streamlined empirical regularity in developed economies such as the US is the co-movement that emanates from range of economic variables (Norrbin & Schlagenhauf, 1996). Lastly, financial openness also spurs cycle synchronization (Imbs, 2004). The prime point is that interconnectedness is critical as shown by the model of optimum currency areas.

Understanding the Four Economic Cycles Business cycles, as discussed early, have four cycles that include expansion, peak, contraction, and the slump or trough. An expansion in the economy is a phase of the business cycle marked by a rise in employment, economic growth, and an upward surge in prices of goods and services. During this phase, aggregate demand and aggregate supply increase which push producers to increase production to meet the demands of the consumers. Three critical factors that cause the economic cycle phases are supply and demand forces, consumer confidence, and availability of capital. Consumer confidence in the unseen or probable future causes the economy to grow because the policymakers are optimistic that the economy is on the right path (Kuznets, 1930).

For example, one can study the history of the U. S. business cycles after the Great Depression and understand the influence of the measure of confidence and its effect on the economy over time. Management of the Economic Cycles It is the responsibility of the government of the day to manage the economic cycle and ensure that the GDP is on track as anticipated to grow. The lawmakers enact and use fiscal policy to shape the economy. The enacted policy works differently in different phases of the economic cycle. They can use the expansionary fiscal policy to counter recession. In case of an overheating, they could resort to contractionary fiscal to stabilize the economy.  Review of Economics and Statistics, 86(3), 723-734. doi:10.