Business Cycles and Their Control Measures

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1. Business Cycles and Their Control Measures UNIT 5: Macro Economics

2. Introduction Business cycles refer to the fluctuations in economic activity over time, characterized by periods of expansion and contraction. This presentation covers phases, theories, and policy measures to control business cycles.

3. Phases of Business Cycles

4. Theories of Business Cycles 1. Keynesian Theory: Demand-driven cycles requiring government intervention. 2. Monetarist Theory: Money supply fluctuations as the primary cause. 3. Schumpeter’s Innovation Theory: Innovation leads to economic booms and slowdowns. 4. Real Business Cycle Theory: External shocks (like oil prices) drive cycles.

5. Impact of Business Cycles • Employment: Higher in expansion, lower in recession. • Inflation: Prices rise in expansion and stabilize in contraction. • Investment: Higher during booms, cautious spending in recessions.

6. Role of Monetary Policy in Controlling Business Cycles • Expansion Phase: Central bank increases interest rates to control inflation. • Recession Phase: Interest rates are lowered to boost investment and demand. • Instruments Used: - Open Market Operations (OMO) - Repo & Reverse Repo Rates - Cash Reserve Ratio (CRR)

7. Role of Fiscal Policy in Controlling Business Cycles • Expansion Phase: Higher taxes and reduced government spending to control overheating. • Recession Phase: Lower taxes and increased government spending to boost demand. • Key Fiscal Tools: - Taxation policies - Public expenditure - Deficit financing

8. Case Studies of Business Cycles • Great Depression (1929): Uncontrolled market speculation and monetary tightening. • 2008 Financial Crisis: Housing bubble burst and banking failures. • COVID-19 Recession (2020): Lockdowns, supply chain disruptions, and policy responses.