CHAPTER SUMMARY
1. A business cycle consists of a period of declining aggregate economic activity (a contraction or recession) followed by a period of rising economic activity (an expansion or a boom).
The low point of the contraction is called the trough, and the high point of the expansion is called the peak. Business cycles have been observed in market economies since the beginning of industrialization.2. The tendency of many economic variables to move together in regular and predictable ways over the course of the cycle is called comovement. We refer to the typical cyclical patterns of key macroeconomic variables as the “business cycle facts."
3. The fluctuations in aggregate economic activity that constitute business cycles are recurrent, having been observed again and again in industrialized market economies. However, they aren't periodic, in that they don't occur at regular or predictable intervals. Business cycle fluctuations also are persistent, which means that once a recession or expansion begins, it usually lasts for a while.
4. Many economists believe that the U.S. economy before 1929 had longer recessions and more cyclical volatility than the post-World War II economy. However, data problems prevent precise measurements of how much more cyclical the pre-1929 economy was. The Great Depression that began in 1929 and didn't end until the onset of World War II was the most severe cyclical decline in U.S. history. The reduced severity of recessions after World War II led to premature declarations that the cycle was “dead." However, the U.S. economy suffered severe recessions in 1973-1975 and 1981-1982, after which the U.S. economy enjoyed a long period of steady growth and tranquility of the business cycle. The “long boom" began in 1982 and ended in 2001, with only one mild recession (1990-1991). The Great Moderation was a period of reduced volatility of GDP and other macroeconomic variables that began in the mid 1980s.
Volatility increased during the Great Recession of 2007-2009 and rose even more during the COVID recession of 2020.5. The direction of a variable relative to the business cycle can be procyclical, countercyclical, or acyclical. A procyclical variable moves in the same direction as aggregate economic activity, rising in booms and falling in recessions. A countercyclical variable moves in the opposite direction to aggregate economic activity, falling in booms and rising in recessions. An acyclical variable has no clear cyclical pattern.
6. The timing of a variable relative to the business cycle may be coincident, leading, or lagging. A coincident variable's peaks and troughs occur at about the same time as peaks and troughs in aggregate economic activity. Peaks and troughs in a leading variable come before, and peaks and troughs in a lagging variable come after, the corresponding peaks and troughs in aggregate economic activity.
7. The cyclical direction and timing of major macroeconomic variables—the business cycle facts—are described in Summary table 10. In brief, production, consumption, and investment are procyclical and coincident. Investment is much more volatile over the business cycle than consumption is. Employment is procyclical, but the unemployment rate is countercyclical. Average labor productivity and the real wage are procyclical, although according to most studies the real wage is only mildly so. Money and stock prices are procyclical and lead the cycle. Inflation and nominal interest rates are procyclical and lagging. The real interest rate is acyclical.
8. A theory of business cycles consists of (1) a description of shocks that affect the economy and (2) a model, such as the aggregate demand-aggregate supply (AD-AS) model, that describes how the economy responds to these shocks. In the AD-AS model, shocks to the aggregate demand (AD) curve cause output to change in the short run, but output returns to its full-employment level, Y, in the long run. Shocks to the aggregate supply curve can affect output both in the long run and the short run.
9. Classical economists argue that the economy reaches its long-run equilibrium quickly because prices adjust rapidly. This view implies that aggregate demand shocks have only very short-lived effects on real variables such as output; instead, classical economists emphasize aggregate supply shocks as the source of business cycles. Classicals also see little role for government policies to fight recessions. Keynesian economists, in contrast, believe that it takes a long time for the economy to reach long-run equilibrium. They conclude, therefore, that aggregate demand shocks can affect output for substantial periods of time. Furthermore, they believe that government policies may be useful in speeding the economy's return to full employment.
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