ECONOMICS

3) The boom and bust business cycle is a repeated process of economic expansion and contraction. Discuss how this impacts a business of yourr choice and the reasons why government prefer to flatten the curve as far as possible.

(25 marks - thousand wrd max)

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I MANAGED TO GET THE FOLLOWING:

Rapid economic expansion and inflation (a boom), followed by a period of economic contraction / recession (falling GDP, growing unemployment) are the hallmarks of boom and bust economic cycles. The boom and bust cycle refers to the cyclical nature of economic growth and downturn. It's a different way of putting the business or economic cycle. These phases, according to the Federal Reserve Bank of Richmond, are unavoidable. y, Growth is beneficial during the boom phase. This period can last for years if economic growth continues within the healthy range of 2% to 3%. 2 It goes hand in hand with a bull market, rising house prices, growing wages, and low unemployment. The bust phase of the business cycle is when the economy is contracting. It's brutal, nastier, and fortunately brief. It lasts an average of 11 months. 4 The economy is contracting, unemployment is at or above 7%, and the value of investments is declining. It's a recession if it lasts more than three months. A stock market crash can set it off, followed by a bear market.

A stock market meltdown has the potential to trigger a recession. As stock values decline, everyone loses faith in the economy's state. When investors are unsure about the future, they remove their money out of the market. They slashed spending on things like purchasing, employing, and investing.

The boom and bust cycle is caused by a combination of three forces. Supply and demand, financial capital availability, and future expectations are the three factors. Each phase of the cycle is caused by the interaction of these three factors.

During a boom, the economy expands, jobs are plentiful, and investors profit handsomely. The economy contracts, people lose their jobs, and investors lose money as a result of the eventual bust. Boom-bust cycles last for different amounts of time and are of various severity.

Strong consumer demand is the driving force during the boom era. Families are optimistic about the future, so they are purchasing more goods now. They are confident that their career prospects will improve, as will the value of their homes and investments. Because of the increased demand, businesses must increase their supply, which they do by recruiting new employees. Consumers and businesses alike can borrow at low rates since capital is readily available. This increases demand, resulting in a positive cycle of wealth.

Rebalancing your financial portfolio once or twice a year is the greatest approach to protect yourself from the boom and bust cycle. It will ensure that you buy low and sell high automatically. If commodities perform well and stocks perform poorly, your portfolio will contain an excessive amount of commodities. You'll sell some commodities and buy some stocks to rebalance your portfolio. As a result, you are forced to sell commodities at high prices and acquire stocks at low prices.

A central bank makes it simpler to get credit during a boom by lending money at low interest rates. Individuals and businesses can then borrow money readily and inexpensively and invest it in things like technology stocks or real estate. Many people profit from their investments, and the economy thrives as a result. The issue is that consumers will overinvest if credit is too simple to obtain and interest rates are too low. Malinvestment is the term for excessive investment. The demand for, say, all of the homes that have been built will be insufficient, and the bust cycle would begin. Things in which too much money has been invested will lose value. Investors lose money, customers cut back on their spending, and businesses lay off workers. As boom-era borrowers become unable to fulfil their loan payments, credit becomes more difficult to obtain. Recessions are defined as times of economic downturn; if the downturn is extremely severe, it is referred to as a depression.

Recognize the reasons of recession so you may prepare your finances ahead of time. Keep track of the top five economic indicators. Keep an eye out for warning flags like excessive interest rates. One of the government's key responsibilities is to establish a balance between incentivizing individuals to spend and preventing out-of-control increases in demand for commodities. Changing the price of money aids policymakers in achieving the difficult task of maintaining a reasonable level of economic activity. Interest rates the cost of borrowing - are cut when the economy needs a boost, encouraging firms and individuals to spend more. Inflation rises gradually as a result of this cheap money flow, compelling central banks to change course. Interest rate hikes cause people to spend less, companies to lose money, and stock prices to plummet. They eventually cause a financial crisis, which sets off a new cycle.

The bust cycle is also aided by a drop in confidence. When the stock market corrects or even falls, investors and consumers become worried. Investors liquidate their positions and buy safe-haven assets like Treasuries, gold, and the US dollar, which have historically held their value. Consumers lose their employment as companies lay off workers, and they cease buying anything except basics. This only adds to the negative economic spiral.

The boom-bust cycle will finally come to an end on its own. This occurs when prices are so low that those investors with cash begin to buy again. This can take a long time and perhaps put you in a depressive state. Central bank monetary policy and government fiscal policy can help restore confidence more rapidly.

Subsidies from the government that make investing more affordable may contribute to the boom-bust cycle by encouraging businesses and people to overinvest in the subsidised commodity. The mortgage interest tax deduction, for example, subsidises a home purchase by lowering the cost of the mortgage interest. More people are encouraged to purchase homes as a result of the subsidies.