Business Cycle

What make a business cycle rotate?

External Shocks

  • Definition

    • An external shock is an event that produces a significant change within an economy, despite occurring outside of it

    • They are unpredictable and typically impact supply or demand throughout the markets

  • Applicability

    • Can cause prices to skyrocket

    • Import/exports

  • Basically

    • It’s when something that doesn’t have to do with the thing has to do with the thing


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Consumer expectations

  • Can be defined as: Perceived-value customers seek from the purchase of a good or services

    • Ex. Black Friday predicting Christmas sales

  • Does consumer expectations affect business cycle?


    • The boom-and-bust cycles in the United States and other parts of the world over the past two decades

    • The stock market collapses in 2000 and 2008 which caused a recession

    • This prompted macroeconomists to take another look at the extent to which confidence, optimism, and changes in expectations may drive and amplify business cycle fluctuations.
  • In turns out that theses variables do affect the cycle

  • They contribute significantly to economic ups and downs.

  • The idea that business cycle fluctuations may stem partly from changes in consumer and business confidence is controversial


  • Consumer expectation test

  • One way to test the idea is to use professional economic forecasts to measure confidence at specific points in time and correlate the results with future economic activity

  • Such an analysis suggests that changes in expectations regarding future economic performance are important drivers of economic fluctuations.

  • periods of heightened optimism are followed by a tightening of their wallets

  • The idea that changes in consumer and business confidence can be important business cycle drivers is an old but controversial idea in macroeconomics

  • It assumes that confidence reacts not only to movements in economic fundamentals but is itself an independent cause of economic fluctuations distinct from those fundamentals.

  • In recent decades, cycles of boom and bust in Japan, East Asia, and the United States have focused renewed attention on the question of confidence.

  • These experiences suggest that optimism about the future helped fuel economic booms and that subsequent buildups of pessimism contributed to the busts.

  • Consumer confidence correlates closely with joblessness, inflation, and real incomes. The growth of help wanted advertising as measured by the Conference Board has also been a strong contributor to consumer confidence. Rising stock market prices can also boost consumer confidence

Real life example

data used by companies on what the consumer expects

Business Investments

Investments are one of the dozens of potential causes of business cycle instability and business cycle contractions. The business sector, in the normal pursuit of profit, creates surpluses and shortages of capital goods as it reacts to interest rates, market conditions, and expectations of the future state of the economy. The result is relatively large changes in investment expenditures, which then triggers expansions and contractions.

A business cycle expansion generates higher interest rates and a surplus of capital that results in a decrease in investment and a contraction in the business cycle. This contraction then generates lower interest rates and a shortage of capital investment that results in investment and an expansion.


What it ultimately means….

  • An expanding economy, caused by greater investment, induces higher interest rates that eventually discourages investment and triggers a contraction.

  • A contracting economy, however, causes lower interest rates that eventually entices greater investment that prompts the onset of another expansion.

Interest rate and credit

Interest

rate can be said to be one of the most influential factors in the economy


It affects not only people individually but the economy as a whole

Who sets interest rates ?

- the FED sets them

They have the job of setting two different interest rates

The discount rate had the federal funds rate

The discount rate is the amount of money the fed charges to lend large amounts of cash to banks

The federal funds rate is the amount of money that large banks charge to lend money to other banks for a short time

As the fed raises or lowers the amount for the discount rate banks can raise or lower the interst rate for lending money to other banks therefore affecting the economy

How can all of this affect people individually ?

Depending on what the banks decide to do with the interest rates if they decide to set the prime rate higher than it would be more expensive for you to get a credit card or receive consumer loans

Economy as a whole? If the interest rates for buying a car go up then people may stop buying as many cars and that is when we see a downfall In the automobile industry therefore causing the economy to lower


Increase in interest rates slow down the economy while decrease in interest rates speeded the economy

Credit

The main concept of credit is buy now pay later

You can already tell where this is going

Some people buy stuff with borrowed money thinking that they will be able to payit off in the long run. They end up borrowing too much that they can't handle to pay. This ends up affecting the economy as a whole people end up spending too much of what they can't afford

If credit is handled this way it can harm the economy however if credit is handled responsibly then it ends up being a plus for everyone it leads to tremendous amounts of growth

Our Group

Business investment- Boston

Interest rate and credit- Carolina

Consumer expectations- Eva

External shocks- Olivia

Smore made by Eva