Example of a Business Cycle
One example of a business cycle is the 2008 financial crisis.
In the early 2000s, the US economy experienced a period of expansion as low-interest rates, easy credit, and a housing boom led to increased spending and economic growth. However, this expansion was built on a foundation of risky lending practices, lax regulation, and a housing market bubble.
In 2008, the bubble burst, as housing prices began to decline and defaults on subprime mortgages began to rise. This led to a credit crunch, as banks and other financial institutions were left with large amounts of bad debt. This, in turn, led to a freeze in the credit markets, making it difficult for businesses and individuals to access the credit they needed to finance their operations and investments.
As a result, businesses began to cut back on their spending and investment, leading to widespread layoffs and a decline in economic activity. This set off a downward spiral, as the decrease in economic activity led to further declines in housing prices, more defaults on mortgages, and even more financial institutions facing financial difficulties.
The government and central bank intervened to stabilize the economy with fiscal and monetary policy. The Federal Reserve lowered interest rates to near zero, and the government implemented a series of stimulus measures, including tax cuts and increased spending, to boost demand and keep the economy from falling into a deep recession.
The economy slowly began to recover, with GDP growing, employment rising, and the stock market rebounding. However, the recovery was slow and uneven, with some sectors, particularly the housing, and the labor market, taking much longer to recover than others.
Business Cycle: What It Means, How to Measure, Its 4 Phases
The term “business cycle” is used in economics to describe the periodic fluctuations in economic activity that an economy experiences over time. These fluctuations can be measured by indicators such as GDP, unemployment, and inflation. The business cycle is also sometimes referred to as the “economic cycle” or the “trade cycle.” The business cycle is a key concept in macroeconomics, which is the study of the economy as a whole.