What make a business cycle rotate?
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
Can cause prices to skyrocket
It’s when something that doesn’t have to do with the thing has to do with the thing
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
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
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
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 affordIf 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
Business investment- Boston
Interest rate and credit- Carolina
Consumer expectations- Eva
External shocks- OliviaSmore made by Eva