Answer:
Business cycles play an important role in a market economy. A business cycle usually lasts for around 8 to 10 years and provides investors with clues about the performance of financial assets. Business cycles affect the GDP of the economy, interest rates, unemployment rates, and other such economic indicators. Business cycles influence the unemployment rate in an economy. During the expansion and peak period in a business cycle, unemployment levels are low. The recession and trough in the business cycle can lead to a rise in unemployment and cuts in wages. Business cycles also affect consumer demand. High levels of unemployment reduce demand, leading to lower sales for businesses. This may force companies out of business. Overcoming a recession period is a challenge for businesses. On the other hand, the recovery and expansion phases encourage new businesses to enter the market.
It is rather difficult for external forces such as businesses to analyze what stage of the business cycle is currently happening and what its affect will be. Understanding past cycles will help prepare businesses and the government for future occurrences. In addition, businesses need to review their operations constantly in order to stay in business. Understanding the effects of each business cycle will help companies make decisions, such as to whether to stay in business or to exit, to minimize economic damage.
There is a common view that the recession phase is bad for the economy, but it is a way for the markets to correct themselves. Phases in the business cycle help improve the performance of the economy. Companies with poor performance die out or merge with stronger companies. This results in a strengthening of the overall economy. Business cycles also help investors to understand the direction of the market and invest wisely.
The Recent Economic Recession
As per the National Bureau of Economic Research, there were ten recessions between 1948 and 2011 in the United States, the most recent one being the recession between December 2007 and June 2009. This recession affected all facets of the US economy.
GDP: The recession affected different industries in different ways. Financial activities took the biggest hit, followed by construction and manufacturing. Wages and salaries were low; consumer spending decreased in all major categories, except in health services and education. Household spending saw a decrease of approximately 8 percent from 2007 to 2010. GDP fell by 4.1 percent, investments by 23.4 percent, and overall consumption by 2.3 percent.
Unemployment: In December 2007, the unemployment rate in the United States was 5 percent, which rose to 9.5 percent by June 2009 and peaked at 10 percent in October 2009. Unemployment rates were initially higher for men than for women, and higher among African Americans and Hispanics than for Caucasians.
Inflation: Inflation peaked at 4.2 percent in the first quarter of 2007. Inflation increased in the first half of 2008 thanks to rising energy and commodity prices, which caused deflation when they declined. The Federal Reserve reduced the interest rates to virtually zero to stimulate spending.
Step-by-step explanation:
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