One important factor of business fluctuations is changes to aggregate Demand. Like I said before, any changes made to consumption, investment or government expenditure will change aggregate demand which as obvious will have fluctuations in Business cycle. Though we are having a combine topic of business cycle and aggregate demand. Let me first explain the basic elements of what Business cycle or fluctuations are:

Definition of Business Cycle

With reference to the book of Samuelson “Business Cycle are economy-wide fluctuations in total national output, income and employment , usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy.”

business cycle

Phases of Business Cycle

There are two main phases of Business cycle:

  1. Recession
  2. Expansion

And two turning points

  1. Peaks
  2. Trough

Recession

is downturn time period from 2 to 12 months. Economically speaking, a decline in income, employment and total output . If Recession last longer than that, it is called Depression. In the business Cycle graph above we can see that the contraction part is basically the situation which goes through the time period of Recession.

Expansion is the progressive part of business cycle which can be interpreted as an improvement in the Income, Output and Employment. Peak and trough is the turning point in the cycle. Peak leads to contraction or recession and trough leads back to the expansion period.

Characteristics of  a Recession

  • Investment falls sharply. Housing Prices are the first to decline either because of the financial crisis or the interest rate has been raised by the Central Bank.
  • Consumer purchases often decline. As businesses slow production lines, real GDP falls
  • Employment usually falls in early stages of recession
  • As output falls, this leads to a slow down of inflation too
  • Business profit Falls sharply
  • As business condition sees a downfall, the central bank begins to lower short term interest rate to stimulate investment so as to move the fluctuation to the expansionary period.