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Four Stages Of The Business Cycle Essay

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Paul Krugman and Robin Wells define the business cycle as “the short run alternation between recessions and expansions”.

The four stages in the business cycle are firstly the peak, which is when the economy turns from expansion to recession where output and employment are falling and the trough where the economy will go from recession to expansion and go into recovery process where the output and employment will rise (Krugmand and Wells).

The fiscal and monetary policies impact on business cycles’ stabilisation

Economists have debated to what extent the monetary and fiscal policy is related to the business cycles. Different schools of thought have explained their point of view regarding the stabilization of business cycles such as the Keynesian, the Friedman’s Monetarist and the classical.
Keynes’s theory of business cycle is both related to the fiscal policy and the monetary policy of the economy since he related the recessions and recovery processes with aggregate demand, highly determined by the fiscal policy, and the interest rate, which is fixed by monetary policies. According to the Keynesian school of thought, in the short run, the level of income, output and employment are the three factors linked to aggregate demand. This leads us to the fact that the fluctuations in the economic activity are of …show more content…

Both policies are used by the government or the Central Banks to ensure that inflation and growth remain as stable as it can. The two policies are used in different cases regarding the current interest rate. The monetary policy is claimed better to stabilise the economy because of the faster results. In a country’s economy the aggregate demand is set by the money flow to the inhabitants as well as the governments. Meaning that both the monetary and fiscal policies have to work together to close or open a recessions

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