CYCLICAL FLUCTUATIONS

Cyclical fluctuations in aggregate economic activities

Table of Contents

Prelude to Business Cycle Fluctuations3

Literature Review4

Critically Analysing Business Cycle5

Declaring A Hypothesis11

Conclusion12

Cyclical fluctuations in aggregate economic activities

Prelude to Business Cycle Fluctuations

As the business cycle fluctuates, the U.S. economy may face increased unemployment in the case of an economic downturn or increased inflation in the stage of an expansion. Therefore, the discussion of business cycles is important in determining the current and future condition of the economy as a whole. This discussion seeks to expand the current body of knowledge of the business cycle by combining the history of economic theory of Veblen, Marx, Schumpterer, Friedman, Keynes, Minsky, and Sherman with the diffusion index popularized by Valentine and Dauten.

The purpose of this discussion are two-folds, the first is to review the theoretical framework of the history of economic thoughts of business cycle and the methodology of diffusion index; second is to use these economic theories and the technique of diffusion index to forecast the strength and direction of the business cycle of the US economy. A recession is a contraction of the economic cycle. The provision of goods and services exceeds the demand for goods and services. The decline in demand for goods leads to the dismissals of employees. Increase employee productivity, layoffs lead to a rise in unemployment. Rising unemployment led to rising consumer bankruptcies and foreclosures. Lay off workers buy fewer goods. The less efficient firms, which are laden with debt pushed out of the market. Finally, the failures of society will lead to a decline in the supply of goods available and demand is beginning to recover slowly. So, how long may take a recession, there is no deadline for a recession. A recession can be as short a period of six months or in recent years. A recession, which is very severe and long duration, may lead to a depression.

Literature Review

Historically, the Business Cycle has been used to describe the up and down fluctuations in the aggregate economy (Real - GDP) as it moves through time. At the beginning of the business cycle, the upward forces (variables) move the cycle in an upward direction. As the cycle continues, this upward movement strengthens as additional variables start to join the forces to move the cycle in the same direction. These forces have a cumulative effect on the cycle, moving it higher and higher until the cycle reaches the peak and are then replaced by forces that move the cycle in the opposite (downward) direction. These downward forces gradually build up until they reach a point of maximum development (Bils, Chang and Kim 2011). At that point, the business cycle reaches its trough. The downward forces then again give way to opposite forces to start a new business cycle. Thus the business cycle is the continuous movement of expansion and contraction caused by the movements of cumulative variables forces. The crisis or the downturn takes place quickly and violently, due primarily to the sudden and violent changes in business and individual ...