Business Cycles

and Aggregate Demand & Aggregate

Supply

The modern world regards business cycles much as the

ancient (প্রাচীন) Egyptians regarded the overflowing of the Nile
(নীল). The phenomenon (ঘটমান বিষয়) recurs (পুনরাবৃত্তি) at intervals, it is of

great importance to everyone, and natural causes of it are

not in sight.

—John Bates Clark, 1898

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Business Cycles
Business cycles are economy wide fluctuations (ওঠানামা)
in total national output, income, and employment,
usually lasting for a period of 2 to 10 years, marked by
widespread (ব্যাপক) expansion (প্রসারণ) or contraction (সংকোচনের)
in most sectors of the economy. There are 4 phases of
business cycles:
1. Boom
2. Contraction (সংকোচনের)
3. Recession (মন্দা)
4. Expansion (সম্প্রসারণ)

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The following are a few of the customary

● Investment usually falls sharply (তীব্রভাবে) in recessions (মন্দা).

characteristics of a recession. (মন্দা).

Housing has generally been the first to decline, either

because of a financial crisis or because the Federal Reserve
(যুক্তরাষ্ট্রীয় মুদ্রানিয়ন্ত্রণ) has raised interest rates to slow inflation. (মুদ্রাস্ফীতি)

Consumer purchases often decline sharply as well. As

businesses slow production lines, real GDP falls.

● Employment usually falls sharply in the early stages of a

recession. (মন্দা) It sometimes is slow to recover in what are
often called “jobless recoveries.”

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 ● As output falls, inflation (মুদ্রাস্ফীতি) slows and the demand
for crude (অপরিশোধিত) materials declines, and materials’
prices tumble. (টলমল) Wages and the prices of services are
unlikely to face a similar decline, but they tend to rise
less rapidly in economic downturns.
● Business profits fall sharply in recessions. (মন্দা) In
anticipation (অগ্রজ্ঞান) of this, common-stock prices usually
fall as investors (বিনিয়োগকারীরা) sniff (নাক সিটকান) the scent (গন্ধ) of a
business downturn.
● Generally, as business conditions deteriorate (অবনতি) and
employment falls, the Federal Reserve begins (যুক্তরাষ্ট্রীয় মুদ্রানিয়ন্ত্রণ)
to lower short-term interest rates to stimulate (উদ্দীপনা)
investment, and other interest rates decline as well.

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 BUSINESS-CYCLE THEORIES
Exogenous (বহিরাগত) vs. Internal Cycles:
 Over the years, macroeconomists have engaged (নিযুক্ত) in
vigorous (জোরালো) debates (বিতর্ক ) about the reasons for business
fluctuations. (ওঠানামা) Some think they are caused by monetary
fluctuations, others by productivity shocks, (ধাক্কা) and still
others by changes in exogenous spending.
There is certainly no end to possible explanations, (ব্যাখ্যা) but it is
useful to classify the different theories into two categories:
1. Exogenous and
2. Internal.

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 01.The exogenous theories find the sources of the
business cycle in the fluctuations (ওঠানামা) of factors
outside the economic system—in wars, revolutions
(বিপ্লব), and elections, in oil prices, gold discoveries, and

population migrations (দেশান্তরে গমন), in discoveries of new

lands and resources, in scientific breakthroughs and
technological innovations; even in sunspots, (সৌরকলঙ্ক)
climate change, and the weather.

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 Example:
World War II changed the political alignment and social structure of
the globe. The United Nations (UN) was established to foster
(প্রতিপালন করা) international co-operation and prevent future conflicts; (দ্বন্দ্ব)
the victorious great powers—China, France, the Soviet Union, the
United Kingdom, and the United States—became the 
permanent members of its Security Council.

The Soviet Union and the United States emerged as rival superpowers

, setting the stage for the nearly half-century-long Cold War.

Most countries whose industries had been damaged moved towards 

economic recovery and expansion. Political integration, especially 
in Europe, began as an effort to forestall future hostilities, end pre-
war enmities and forge a sense of common identity.

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 02. The internal theories look for mechanisms within the
economic system itself. In this approach, every
expansion (প্রসারণ) breeds recession (প্রজাতির মন্দা) and
contraction, and every contraction breeds revival and
expansion. Many business cycles in U.S. economic
history were internal cycles that originated in the
financial sector. It is for this reason that we devote
(নিবেদিত) much of our attention to monetary and financial

economics.

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AGGREGATE DEMAND
Aggregate demand (or AD ) is the total or aggregate
(সামগ্রিক) quantity of output that is willingly (স্বেচ্ছায়) bought at

a given level of prices, other things held constant. AD

is the desired (আকাঙ্ক্ষিত) spending in all product sectors:
consumption, private domestic investment,
government purchases of goods and services, and net
exports. It has four components:
AD= Consumption+ Investment+ Government
Expenditure + Net Export

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THE DOWNWARD-SLOPING AGGREGATE
DEMAND CURVE
The AD curve slopes downward. This downward slope
(ঢাল) implies (বোঝায়) that real spending declines as the

price level rises, other things held constant. Real

spending declines with a higher price level primarily
(প্রাথমিকভাবে) because of the effect of higher prices on real

incomes and real wealth.

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Shifts in Aggregate Demand
We can separate the determinants of AD into two categories,
Such as
1. Policy Variables
2. Exogenous Variables.
One set includes the macroeconomic policy variables , which
are under government control. These are monetary policy
(steps by which the central bank can affect interest rates
and other financial conditions) and fiscal policy (taxes and
government expenditures). The following table illustrates
how these government policies can affect different
components of aggregate demand.

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 The second set includes exogenous variables, or
variables that are determined outside the AS-AD
framework. As following table shows, some of these
variables (such as wars or revolutions) are outside
the scope of macroeconomic analysis proper, some
(such as foreign economic activity) are outside the
control of domestic policy, and others (such as the
stock market) have significant independent
movement.

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Aggregate Supply
Aggregate supply refers to the total quantity of goods
and services that the nation’s businesses willingly
produce and sell in a given period. Aggregate supply
(often written AS ) depends upon

#.The price level

#. The productive capacity of the economy
#. and the level of costs.

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 Price Level

AS

0
Level of output

Figure: Aggregate Supply Curve

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Macroeconomic Equilibrium
A macroeconomic equilibrium is a combination of overall price and quantity
at which all buyers and sellers are satisfied with their overall purchases,
sales, and prices.
If the price level were higher than equilibrium, say, at P= 200, businesses
would want to sell more than purchasers would want to buy; businesses
would desire to sell quantity C , while buyers would want to purchase only
amount B . Goods would pile up on the shelves as firms produced more than
consumers bought. Because of the excess aggregate supply of goods, firms
would cut production and shave their prices. The overall price level would
begin to decline or rise less rapidly.

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 As the price level declined from its original too high level, the
gap between desired total spending and desired total sales
would narrow. Eventually, prices would decline to the point
where overall demand and production were in balance.

At the macroeconomic equilibrium, there would be neither excess

supply nor excess demand—and no pressure to change the
overall price level.

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Aggregate Supply and Demand Curves
Aggregate supply and demand curves are often used to help analyze
macroeconomic conditions. Just like microeconomics, an analogous
graphical apparatus can help us understand how monetary policy or
technological change acts through aggregate supply and demand to
determine national output and the price level.

The following figure shows the aggregate supply and demand schedules for
the output of an entire economy. On the horizontal axis is the total output
(real GDP) of the economy. On the vertical axis is the overall price level (as
measured by the “price of GDP”). We use the symbol Q for real output and
P for the price level.

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 The downward-sloping curve is the aggregate demand schedule, or AD
curve. It represents what everyone in the economy —consumers,
businesses, foreigners, and governments —would buy at different aggregate
price levels (with other factors affecting aggregate demand held constant).
From the curve, we see that at an overall price level of 150, total spending
would be $3000 billion (per year). If the price level rises to 200, total
spending would fall to $2300 billion.

The upward-sloping curve is the aggregate supply schedule, or AS curve.

This curve represents the quantity of goods and services that
businesses are willing to produce and sell at each price level (with
other determinants of aggregate supply held constant).

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According to the curve, businesses will want to sell $3000 billion
at a price level of 150; they will want to sell a higher quantity,
$3300 billion, if prices rise to 200. As the level of total output
demanded rises, businesses will want to sell more goods and
services at a higher price level.

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