Activity Variation With Business Cycle
Business Activity Business cycle indicators such as inventories are crucial. Companies need to maintain an adequate supply of inventory to meet demand, but they do not want to tie up too much capital in inventory. In many industries, the inventory…
Credit Cycles
The term “credit cycle” refers to cyclical fluctuations in interest rates and credit availability. During an improving economy, lenders are more willing to extend credit at favorable terms. In contrast, lenders tighten their lending standards in a weak economy by…
Business Cycle and Its Phases
A business or economic cycle is defined as the persistent fluctuation in the gross domestic product of a given economy within a specified period. A business cycle can be described by periods of expansion and recessions. During a recession, the…
Input Growth and Growth of Total Factor Productivity as Components of Economic Growth
Input Growth Already, we are well aware that the productive capacity and potential GDP of an economy increase due to the following two reasons: This model of input growth entirely depends on a production function. It gives a quantitative connection…
Production Function Approach to Analyzing the Sources of Economic Growth
The production function (or Solow growth model) is used to determine the economy’s underlying source of growth. It attributes the growth of the gross domestic product (GDP) and productive capacity to: The production function explains that the gross domestic product…
Economic Growth
The sustainability of economic growth is measured by the rate of increase in productive capacity and/or by the potential gross domestic product of the economy. Sources of Economic Growth The growth accounting equation emphasizes the main factors that determine growth….
Effects of Combined Changes in Aggregate Demand and Supply on the Economy
Aggregate Demand Aggregate demand is the total demand for goods and services in an economy. It is defined as the sum of the amount spent on real goods and services by all economic agents. It is calculated as shown below….
Short-run Macroeconomic Equilibrium Below or Above Full Employment
Short-run macroeconomic equilibrium only occurs when the amount of real GDP demand equals the amount of GDP supply. On a graph, this happens at the point where the AD curve intersects the short-run average supply curve, exactly on the long-run…
Long-run Full Employment, Recessionary Gap, Inflationary Gap, and Stagflation
Long-run Full Employment Long-run full employment equilibrium occurs when the aggregate demand (AD) curve cuts the short-run aggregate supply curve (SRAS) at a point on the long-run aggregate supply curve (LRSS): Since the intersection occurs at a point on the…
Fluctuations in Aggregate Demand and Supply
Economists believe that business cycles and fluctuations in GDP levels result from a shift in the aggregate demand or supply curve. The Business Cycle The business cycle (economic expansions and contractions) is mainly caused by changes in the short-run value…
