Answer the following questions from the textbook pages of the pdf

These are the questions and pages are mentioned below:

1. List the 4 phases of the business cycle
2. Explain why the expansionary phase tends to feed itself.
3. Identify the characteristics of a contractionary phase and expansionary phase of the business cycle.
4. When does a contraction become a recession.

Peak Peak + Recession Recession Real Expansion - Expansion GDP Trough Trough Time262 Chapter 13 | Business Cycles and Fiscal Policy business cycle A rise and fall in national Business Cycles economic performance characterized by four phases: To understand the purpose of fiscal policy, we must first understand what a peak contraction. trough. business cycle is. A business cycle is a period of swings in national economic and expansion. performance as measured by changes in real GDP. It is characterized by four distinct phases expansion, peak, contraction, and trough. A business cycle represents the ups and downs of the economy. The duration of a business cycle and its size (in loss or gain of real GDP) vary from one cycle to the next and are very difficult to predict. Some expansionary for growth) periods are extended, while others are not. Some contractionary periods can last a long time, becoming recessions, while others seem to disappear before we notice them. In Canada, since the Second World War, recessions have averaged 13 months in length, while expansionary periods have averaged 6 years, although the two expansionary periods prior to 2018 both lasted more than 10 years A business cycle occurs because of the fluctuations (expansion and contraction) that economies experience over time. Earlier in this chapter, we explained such changes as shifts of the AD and AS curves. Business cycles, then, are at the heart of macroeconomics Economists try to determine how well the economy is doing and, more importantly, where it is heading. Forecasting patterns in the business cycle allows economists to advise political and business leaders on how to deal with possible adverse future economic events. When the economy is heading in an undesirable direction, economists may advise a country's leaders to apply policies to try and alter the course of the economy- FIGURE 13.6 An economic business cycle is a time period of alternating expansion and contraction In dis figure. the horizontal axis measures time, while the vertical axis yields the real GDP growth rate. While the cycle appears to be even and regular, it is drawn this way only for simplicity. Actual business cycles vary in length and slope Peak Recovery . decreasing prices expansion . rising prices increasing unemployment Real GDP lower unemployment decreasing production Recovery * nsing production Recession . lower incomes expansion * rising incomes contraction Trough TimeEXPANSION prosperity cycle An increase in aggregate The causes of fluctuations in economic activity are varied. The cyclical nature demand leading to a cycle of higher production, more of the marketplace is dynamic, and it is not possible to detail all the reasons jobs. increased Income. for cyclical fluctuations in the economy. Here we will look at two examples to and greater consumption illustrate how a simple macroeconomic model works. result ing in even higher aggregate demand. An expansion period begins when consumer spending increases and production increases. As Figure 13.6 shows, expansion is represented by an upward trend in the business cycle. Let's assume that the Canadian economy is on an upswing- that is, unemployment is declining, business activity is increasing, and there is increased production. Generally, increased production leads to more workers being hired. New employment leads to a general rise in consumer incomes, which, in turn, generates increased levels of consumption spending. Consumer psychology that is influenced by positive economic news can also contribute to increased spending, Increased spending translates into an increase in the demand for goods and services. As we described earlier in this chapter, an increase in aggregate demand leads to higher levels of output and employment as well as higher prices. This higher demand leads to increased production, more workers being hired, and so on. As Figure 13.7 shows, this prosperity cycle is the result of aggregate demand feeding Itself At first glance, it would appear that, as long as resources are available, this trend for greater and greater economic expansion should continue, which is part of the psychology that drives expansionary periods to their peak. However, at some point economic expansion inevitably ends, The economy will peak, and then the trend will begin to reverse. The reasons for the turnaround at the peak of a business cycle are varied, and therefore difficult to predict. Although economists invest a lot of time in trying to discover patterns and clues, there is no surefire way to be certain when a contraction will begin. FIGURE 13.7 The prosperity cycle production Higher Greater levels aggregate demand of employment Increased Increased consumpa on incomeCONTRACTION The contraction begins as the business cycle passes its peak (see Figure 13.6). Consumers may simply have exhausted the purchasing patterns that pushed up aggregate demand. After all, many of the expensive durable goods (such as automobiles, appliances, and new homes) that drive a booming economy do not need to be replaced very often. Demand begins to decrease when many consumers' wants are satisfied. Sometimes, the turnaround is linked to an event, called a "shock, " such as the stock market crash that occurred on October 29, 1929. When this event was combined with restrictive trade policies, the dependence of the Canadian economy on the market for natural resources, and reduced investment and government spending, the result was a huge drop in aggregate demand. Frequently, peaks are created by "bubbles." A bubble is characterized by a rapid Increase in the value of assets such as stocks, bonds, precious metals, or land. These bubbles are often caused by irrational expectations that an increase in asset values will continue. A surge in asset values often makes people feel wealthy, so they increase consumption. The United States recession of 2008-2009 was blamed in part on a "housing bubble" that saw house prices rise significantly. A lot of consumer spending was supported by credit attached to the price of houses that were overvalued. When house prices dropped in a "correction," many people were unable to pay back their debts and lost their homes as a result, which triggered a contraction. A contraction can also be the result of producers competing for capital funds to support business expansion, which tends to put upward pressure on interest rates. When interest rates rise, consumers are less likely to buy goods for which they need to borrow money - the durable goods that make up almost 10 percent of our GDP. Finally, if the AD curve shifts too far to the right, it will exceed the economy's capacity to produce, At this point, according to aggregate supply and demand analysts, more severe inflation begins to occur. As prices rise, higher inflation DID YOU KNOW? levels have the effect of reducing the real income of consumers. As a result, The CP. real GDP growth rate. aggregate demand begins to decline. Together, these factors have the effect of and the unemployment rate reversing the direction of shift of the AD curve. Instead of moving to the right, as are all "lagging indicators " They provide information. it did while the economy was expanding, it now begins to shift to the left. This about economic conditions trend is reflected in the contractionary part of the business cycle, which has a after comfractions are negative slope. underway. Econo Nic forecasters try and identify In a reverse of the prosperity cycle, reduced demand for domestic goods leads to leading indicators" that can an accumulation of business inventories, and firms tend to be overstocked with predict when a contraction will occur. This goal is goods, An increase in business inventories Indicates to firms that they should cut notoriously difficult because back production Production cutbacks lead to worker layoffs, which in turn lead every contraction is unique. to lower incomes. Some leading indicators include factory Orders for Decreased incomes lead to a decrease in consumer demand for goods and goods, the issue of building permits, and Changes In services, shifting the AD curve to the left. If a decrease in aggregate demand commodity prices occurs, the revenues of firms will tend to decline. Some firms will be forced to cutback production to control coats, while others may lay off workers, and firms that recession cannot reduce their costs may go out of business. When this type of downward A contraction of the spiral in economic activity occurs, it is referred to as a recessionary trend. It is economy in which real GDP declines for a minimum of generally agreed that a recession occurs when real GDP growth is negative, or two consecutive business declines, for two consecutive quarters (two consecutive three month periods). quarters (six monthal The recessionary, or contractionary, part of the business cycle is characterized by depression increasing levels of unemployment, low (or negative) levels of real GDP growth, A prolonged recession chan terized by falling GDP. and low levels of inflation or even falling prices (deflation]. very high unemployment, The contractionary period is often influenced heavily by consumer psychology. and price deflation As media reports of layoffs (and the threat of more layoffs) occur, those who still have jobs reduce their levels of consumption spending. Sometimes individuals begin to save to provide a "cushion" in case they should find themselves out of work-an increasingly likely prospect, according to the news reports. Others may cut back on the purchase of "big ticket" durable goods, fearing to increase their debt load at a time when wage increases are unlikely, and loss of income is possible. These changes in the level of consumption spending make the contractionary period worse as they tend to pull the AD curve farther to the left. If a recessionary period becomes prolonged, with very high unemployment and very low output levels, it is known as a depression At some point, events will occur that will stop the downturn in economic activity and will generate increases in consumer spending, For instance, prices may fall to a point where consumers start to spend again, and the upward movement of the business cycle resumes. Also. consumers can postpone the purchase of some items only for a certain length of time. A new automobile or refrigerator is bought when it is no longer worthwhile to repair it. Clothes wear out. As consumer purchases grow, the inventory of firms begins to dwindle, and, in most cases, firms increase production again. While these regular fluctuations of economic activity can vary in duration and intensity, over time the level of business activity in an economy tends to increase steadily (see Figure 13.8). FIGURE 13.8 Expansion The phases of the Contraction ; Peak business cycle can vary in intensity and recession duration Expansion Contraction Over time. however, a Peak steady upward growth trend is apparent recession : Boom Real GDP Peak Recovery Trough Trough Timecircular flow of income CIRCULAR FLOW OF INCOME A model of the economy that Sex GOP as a total of all the money payments made co A business cycle can also be explained by focusing on the money payments that businesses and Individuals. flow through the economy. This circular flow of Income represents the GDP as a leakage total of all money payments flowing in the economy in one year. Businesses pay Am use of income (such as individuals from households in exchange for their labour, and pay individuals Barring, parrying takes and money through interest payments on the capital that they borrow for expansion. spending on Imports that causes money to be taken out Individuals, in turn, spend the money they earn on the goods and services that of the income-expend cure businesses produce. This simplified circular flow of income appears in green in stream of the economy. Figure 13.9 injection Any expenditure (such as Changes in the level of aggregate demand occur because of leakages and investment government injections in the circular flow of income, as demonstrated in Figure 13.9. The spending and exportsl that causes money to be put into term leakages describes any payments that lead to money being taken out of the income-expenditure the central income-expenditure stream of the economy. Due to the role of the stream of the economy. government, financial intermediaries such as banks, and foreign markets, the money flowing between businesses and households is subject to three leakages as it circulates. These leakages are taxes (T), savings (5), and imports (M) Taxes levied by the government on financial transactions must be paid, some of the income generated by production will be saved by both households and businesses, and some of the money flow will be used to buy imported goods, Each of these leakages in the circular flow of income has a counterpart. Injections are defined as any expenditure that leads to money returning to the central income-expenditure stream. The three major injections into the economy are government spending [GI, investment (), and exports (X). Note that consumption is not considered an injection; however, It is hidden in the leakages FIGURE 13.9 The circular flow of income The circular flow of income (shown in green) with leakages (shown in red) and injections (shown in blue). Injections Circular flow of income Leakages HOUSEHOLDS Govt. Spending Tame's Payments for land, labour, Payments for Investment capital, and goods and Savings entrepreneurship services Exports Imports BUSINESSES