Business Cycles
A Business Cycle refers to the natural rise and fall of economic activity over a period of time. It is also known as the Economic Cycle. In simple words, the economy does not grow in a straight line. Instead, it moves like a wave with ups and downs. These movements are measured by looking at the Gross Domestic Product (GDP), which is the total value of goods and services produced in a country. A business cycle has four main phases: Expansion, Peak, Contraction, and Trough.
Concepts (3)
Aggregate money supply is the total amount of money available in an economy. It includes cash held by the public and deposits in banks.
Aggregate money supply is the total amount of money available in an economy. It includes cash held by the public and deposits in banks. A key concept for exams is that moving money from a bank account (Demand Deposit) to your pocket (Cash) does not change the total money supply. It only changes the form of the money. To reduce inflation, the government must reduce the total circulation of money through higher taxes or higher interest rates.
A Recession is a period of temporary economic decline where trade and industrial activity are reduced. It is usually identified by a fall in GDP in two successive quarters.
A Recession is a period of temporary economic decline where trade and industrial activity are reduced. It is usually identified by a fall in GDP in two successive quarters. If a recession is very severe and lasts for several years, it is called a Depression. An example is the Great Depression of 1929, which lasted for a decade and caused massive poverty globally. In a recession, the government usually lowers taxes to encourage people to spend more money and boost the economy.
The Reserve Bank of India (RBI) uses monetary policy to manage business cycles. During an Expansion, the RBI may increase interest rates to reduce the money supply and control inflation. This makes borrowing expensive for people.
The Reserve Bank of India (RBI) uses monetary policy to manage business cycles. During an Expansion, the RBI may increase interest rates to reduce the money supply and control inflation. This makes borrowing expensive for people. During a Contraction, the RBI lowers interest rates. This makes loans cheaper, encouraging businesses to borrow money and invest. For example, during the 2020 lockdown, the RBI reduced rates to help businesses survive the economic slowdown.
Ready to practice? Start an interactive lesson.
Start Lesson: Aggregate Money Supply