Business Cycle
Business Cycle, Unemployment and Inflation
Embedded Files
Case Study
Financial Crisis in 2008-09
In 2008, owing to the US housing bubble and fueled by the bankruptcy of Lehman Brothers, one of the largest investment banks in the US, the global economy was crashed heavily – many people lost their jobs, companies were forced out of production, investors lost their wealth…
Source A: Few economic indicators of the US economy in 2000-10
Source A: Few economic indicators of the US economy in 2000-10
To assess the health of an economy, economists often rely on macroeconomic indicators, such as gross domestic product (GDP) growth rate, inflation rate, and unemployment rate. The graph illustrated the unemployment rate (blue line), inflation rate (green line, measured by the percentage change in the Consumer Price Index (CPI)), and the Federal Reserve Bank's (FED) target interest rate (red line) in different time periods between 2000 and 2010. The gray region represents economic contractions while the white region represents economic expansions.
Source B: Federal Open Market Committee (FOMC) statement on January 22, 2008
The Federal Open Market Committee has decided to lower its target for the federal funds rate (inter-bank lending rate) to 3.5 percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. Moreover, incoming information indicates the labour market is weak.
Source C: a news reporting titled “Majority of People Believe Recession Underway” on February 10, 2008
For all of 2007, the economy grew by just 2.2%. That was the weakest performance since 2002, when the country was struggling to recover from the last recession. The housing market collapse was the major reason.
Housebuilders cut jobs in January for the first time in more than four years. Employment concerns are contributing to darker feelings about the economy and people's own financial well-being. Workers' average weekly earnings, adjusted for inflation, fell 0.9% last year. In 2006, earnings grew by a solid 2.1%.
Consumer confidence dropped to a mark of 48.5 in early February. It was the worst reading since the index began in 2002.
Source D: Unemployment rate and inflation rate in 2007 - 2009
Source E: Federal Open Market Committee (FOMC) statement on December 16, 2008
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 0.25%. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in the coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability, for example keeping the exceptionally low levels of the federal funds rate for a period of time.
POINT TO DISCUSS:
In the figure of Source A, why there are only 2 phases, expansion (white region) and recession (gray region) shown instead of the 4 phases suggested by the business cycle theory?
Hint: Think about how and when the economic data is obtained, and why investors want to know the phase of the economy at a particular point
Hints and Related Concepts
(About the function of Monetary Policy)
What are the functions and goals of FOMC by lowering the federal funds rate?
Hint: Look carefully from the FOMC statements above. What did FOMC do? What are their targets?
Hints and Related Concepts
Can you justify FED’s decision to cut interest rates continuously since late 2007?
Hint: Following the above question and think about how cutting interest rates is related to its goal.
Hints and Related Concepts
Do you think FED’s policy performs effectively during 2008-09?
Hint: Did FED achieve its goal? Try to evaluate it using economic data and economic facts.
Hints and Related Concepts
Printing money is one of the techniques deployed during quantitative easing. How does it relate to inflation? Are the observations in 2008 consistent with the theoretical result?
Hint: What would happen to the real value of money if there is more supply of money? What is the relationship between real money and inflation rate?
Hints and Related Concepts
How did real assets perform during 2008? Try to research on your own and observe their relationship with the business cycle.
Hint: You may do some research on real assets like foreign exchange, bond yield, stock market, and housing market during 2008. They showed interesting price trend along with the recessionary period.
Hints and Related Concepts
Want to have a revision first?
The following learning resources help you to improve your understanding of this topic.
Page updated
Report abuse