The business cycle - Research Paper Example

It can thus be said that if the economy is at a high rate of unemployment the fiscal as well as the monetary policy of the economy will react to adjust the rate of unemployment .According to Slutsky the stochastic shocks can be viewed as the sole reason for creating business cycles. But the spectral analysis has confirmed that business cycle exists at a level of statistical significance which is acceptable. Apart from the Keynesian view there are many other schools of economy that explains the business cycle.

However in the recent times the economic theories follow the trend of economic fluctuations rather than business cycle. As per the changes in the direction of the economic activities the business cycles are dated. As long as the economy is at the full level of employment there occurs no fluctuation. However whenever the economy responds to changes in any of the economic variables the business cycle starts. One of the possible causes of a boom and a recession in an economy is the monetary policy.

Such a description for the cause of business cycle goes back to the Keynesian and new Keynesian views which states that nominal rigidities are the reason behind such cycles. On the other hand the classical economics theory believes that the modern economy is too flexible and the so the changes in the spending pattern does not affect the employment and the real output (Romer.2008) These business cycles are measured by the rate of growth of the GDP. However the NBER gives little importance to the GDP as it is subjected to frequent revision .

It rather relies on the employment, personal income and industrial production as the indicators. There are basically five stages in a business cycle which are 1.Expansion 2. Peak 3.Recession 4.Trough 5.Recovery.These business cycles are highly irregular and they heavily vary in terms of magnitude, frequency and