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Understanding the Factors Influencing Business Cycles

Explore the dynamics of business cycles, from investments and interest rates to consumer expectations and external shocks. Learn about the impact of historical events like the Great Depression and how they shape economic fluctuations.

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Understanding the Factors Influencing Business Cycles

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  1. What affects business cycles??

  2. Business investments • As economy is expanding, a business will invest in new technology and resources to increase production. • This creates jobs and output---increasing GDP. • Eventually they will stop investing, demand for product will fall, and contraction within the business will occur.

  3. Interest Rates and Credit • When interest rates are low, consumers and businesses are more likely to borrow money to buy or produce items. • High interest rates = reduced borrowing for investment, consumption, and production.

  4. Consumer Expectations • Fear of weakening economy will cause less spending/investing. • Reduced spending from consumers causes contraction within businesses because demand has lowered. • All this lowers the nation’s GDP.

  5. External Shocks • Negative shocks: disruptions of oil supply, wars, droughts • Positive Shocks: discovery of new oil supply, nice growing season • Both types come without much warning!!

  6. The Great Depression • Stock Market dives in 1929—President Hoover does little about it. • Sustained contraction led economists to believe that intervention was necessary • Franklin Delano Roosevelt was elected and implemented many governmental programs aimed to aid the economy.

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