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Influences on the Business Cycle

This article explores the various factors that influence the business cycle, including business investment, money and credit, public expectations, and external factors. It also examines how economists predict and analyze fluctuations in the business cycle using leading, coincident, and lagging indicators.

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Influences on the Business Cycle

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  1. Influences on the Business Cycle Expansion/Recovery Peak Contraction/Recession Trough

  2. The factors that affect supply and demand also cause the fluctuations in the business cycle.

  3. Businesses invest in capital goods –such as new machinery- to increase their production • High levels of business investment promote expansion in the business cycle. • Low levels of investment contribute to contractions. BUSINESS INVESTMENT

  4. By purchasing new capital goods, businesses create a demand for these goods. • Businesses use the new capital to moderate production methods and promote efficiency. • Increased business investment (particularly in the research and development) tends to stimulate technological change and generally results in higher output at lower productions costs. BUSINESS INVESTMENT

  5. Many times, the amount of money in circulation depends mainly on government policies. • Individuals and businesses generally borrow more money to make purchases when interest rates are low. MONEY & CREDIT

  6. Expectations about future economic conditions can shape current economic behavior as well. • If consumers believe that the economy is heading toward a recession, they may decide to limit their spending in order to save money for the hard times ahead. PUBLIC EXPECTATIONS

  7. Changes in the world’s economic or political climate also affect the business cycle in the United States. • OIL PRICES • WAR EXTERNAL FACTORS

  8. PREDICTING the BUSINESS CYCLE Economists try to predict fluctuations in the business cycle. Decision makers in business use these predictions of future economic activity to help plan for plant construction, expansion, or modernization, production goals, and hiring.

  9. Economists often rely on three types of economic indicators to determine what phase of the business cycle the economy is currently in and in which direction it is heading…. Leading IndicatorsCoincident IndicatorsLagging Indicators

  10. Anticipate the direction in which the economy is headed • Changes in the number of building permits issued, the number of orders for new capital and consumer goods, the price of raw materials, and stock prices. LEADING INDICATORS

  11. Provide information about the current status of the economy. • COINCIDENT INDICATORS change as the economy moves from one phase of the business cycle to another • Tell economists that an upturn or a downturn in the economy has arrived • Personal Income, Sales Volume, Industrial Production Levels COINCIDENT INDICATORS

  12. Change months after an upturn or a downturn in the economy has begun • Help economists predict the duration of economic upturns or downturns • Use of consumer credit, the number and size of business incomes. LAGGING INDICATORS

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