The economic cycle is the natural fluctuation of economy between period of expansion (growth) and contraction (recession). Factors such GDP,interest rate, levels of employee and consumer spending can help to determine the current stage of the economic cycle.
During times of expansion, investors seek to purchase companies in technology, capital goods and basic energy, and during times of contraction, investors look to purchase companies such as utilities, financials, and healthcare.
An economic cycle, also referred to as the business cycle, has four stages: expansion, peak, contraction and trough. During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases in inflationary pressures build. The peak of a cycle is reached when growth hits its maximum output. Peak growth typically creates some imbalances when growth slows, employment falls and prices stagnate. The trough of the cycle is reached when the economy hits a low point in growth from which a recovery can begin.
The economic or business cycle is managed by the government, the biggest tool at its disposal to control the cycle is fiscal policy, in order to end the recession, the government will employ expansionary fiscal policy, and conversely, it will use contractionary fiscal policy to stop the economy from overheating.
Central bank will use monetary policy in order to help manage and control the economic cycle. When the cycle hits the through, a central bank will lower interest rates or implement expansionary monetary policy. When it raises rates, or uses contractionary monetary policy, it manages an economic expansion to prevent it from peaking.
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