BUSINESS CYCLE

The short-term fluctuations in output, employment, financial conditions, and prices

that we call the business cycle.
Or all market economies show patterns of expansion and contraction known as
business cycles.
High prices, high unemployment (Nominal
GDP increases, real output falls)

INFLATION

(Expansion) (Contraction) Stable prices,

Stability Economic
growth ( Real
GDP grows)

RECESSION

Low prices, high unemployment (Real GDP

falls)
 AS: total quantity of
ECONOMY ECONOMY
goods & services
nation’s businesses
willingly produce
and sell in a given
period

AD: Total
spending on
goods & services
by different
sectors of
economy (C+I+G+
INFLATION RECESSION
Xn)

Money Supply: Quantity of money in circulation in certain point of time. MS stable

Money (anything used as a commonly accepted medium of exchange)  Prices  Inflation/Recession

Export : receive (inflow

Gold+ gold n silver)
5000 Rs. Silver+
foreign Import: payment (
reserves ($) outflow gold n silver )
Paper currency, no intrinsic value

Business-cycle fluctuations in output, employment, and prices are often caused by

shifts in aggregate demand. These occur as consumers, businesses, or governments
change total spending relative to the economy’s productive capacity. When these
shifts in aggregate demand lead to sharp business downturns, the economy suffers
recessions or even depressions. A sharp upturn in economic activity can lead to
inflation.
Recession: Downturn of a business cycle is called a recession. A recession is a
recurring period of decline in total output, income, and employment, usually lasting
from 6 to 12 months and marked by contractions in many sectors of the economy. A
recession that is large in both scale and duration is called a depression. An alternative
definition sometimes used is that a recession occurs when real GDP has declined for
two consecutive calendar quarters.
Inflation:
The case of an economic expansion is just the opposite. Suppose that a war leads to a
sharp increase in government spending. As a result, the AD curve would shift to the
right, real output falls, unemployment, prices and inflation would rise.