Business Cycles and Their Characteristics - Video Tutorials & Practice Problems
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Causes of Business Cycles
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So why do we go through business cycles? Why aren't we just constantly growing? Why is their growth and then recession and then growth? Why doesn't it happen smoothly? Well, it's because events happen rather sporadically, right spontaneously? We get shocks to the standard flow of things that cause unexpected booms in the market and I don't expect it uh bus recessions in the market. Right? So the main idea here is that things happen, we'll say spontaneously, right? So when we have a shock in the market, well, that's going to cause uh, an unexpected growth or uh recession. Right? So the first thing is irregular innovation, there's going to be big inventions that come around. There's going to be revolutionary technologies that cause economic booms, right? Like when we had the railroad, automobiles or most recently the internet, right? When these things were created, there was sudden expansion in our economy economy that was unprecedented, Right? So what happens is after one of these expansions or one of these inventions, there's unprecedented expansion. But eventually our economy is going to absorb this new technology, right? All that expansion that can happen, the railroad gets built and now we have this new growth in the logistics business. Well, that logistics business is going to cap out eventually, Right? The transportation of people from east to west is gonna cap out eventually and it's going to be absorbed by the economy. So that expansion has to end eventually. Right? So the growth is going to slow down from that new technology until a new technology uh, comes through, right? And these ideas, they occur sporadically? it's not like oh, every five years. We have a new revolutionary idea, right? We can't plan on it like that. It's just something that happens all of a sudden. So irregular innovation causes these shocks in the market. Another one, productivity changes. This is similar to irregular innovation. Um, productivity changes, well, changes in productivity. This could be caused by uh technology. Any kind of change in technology could cause increased productivity or maybe availability of resources, right? Or resources. Even human capital, Right. New public education system leads people to have more human capital leading to higher productivity could lead to unexpected booms and busts. So just like a key resource such as oil being more available. If there's a new oil deposit found and the price of oil decreases a lot. Well, it allows a lot more businesses to invest and use the oil to increase the economy. Right? So any kind of shock like that and availability of a key resource can lead to a shock in the economy. Another shock to the economy is monetary factors. So this is more controlled because this is monetary policy by the Federal Reserve. This is controlled and they're usually trying to fix a recession or help the economy in some way when they make some sort of monetary policy change. And we're going to discuss monetary monetary policy in a lot of detail in in other videos. So for now we'll just know that the Fed can have shocks to the economy through their monetary policy, right, printing a bunch of money or buying a bunch of bonds and, um, or selling bonds, right? Whatever it might be. So monetary factors and another one political events. What if there's an unexpected war happens, peace, terrorism, anything like that can, can cause a shock to the economy, a boom in the economy or a bust right from some sort of unexpected political event. And finally, there's financial instability, Um, from a bubble, let's say there's some sort of bubble in the market. Like we saw in 2008, uh, during the recession, there was a huge bubble that was burst and that was in the real estate market, right? We saw a big decrease in real estate prices that caused an unexpected decrease leading into a big recession. Right? So it's paused real quick and we'll talk about one more thing. A little conclusion here about our business cycle. Cool. Let's do it. In the next video
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Key Ideas of the Business Cycle
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All right. One of the key things to remember about the business cycle about our recessions and expansions is the connection to unemployment and inflation. Alright. What we see is that during a recession, unemployment tends to increase, right, and that's that should come logically right, unemployment increases during the recession, there's no jobs available. So there's a lot of unemployment unemployment increases. So what do you think happens during an expansion? Well now businesses are spending, businesses are hiring, right, they're expanding their businesses. So unemployment decreases during an expansion. And the key thing to remember is that they're opposites, unemployment and inflation are opposites. So they kind of go in opposite directions. So during the recession, while unemployment is increasing, well during a recession inflation is decreasing, right? Because there's no uh nobody spending money, those price levels are dropping, trying to sell inventories, trying to get rid of money. We see that price levels start to drop again during a recession. And guess what, what do you think happens during an expansion? Everyone's making more money, wages are going up, everything's going up. We've got an increase in inflation, right, inflation increases during an expansion. Cool. So that's a key thing to remember is this opposite effect of unemployment and inflation. Now I think the easiest thing to remember is that unemployment during a recession, what do you think unemployment during the recession? I think that's very flows very logically unemployment during a recession is going to increase, there's no jobs available. So if you can remember that unemployment during the recession increases? Well you can remember everything else here because everything happens in opposite. Right? So unemployment increasing during during a recession? Well you'll remember that inflation decreases because it's going to be the opposite. Okay, unemployment and inflation they tend to be opposites there. So one more weird term that they like to bring up and this actually happened during the latest recession um is a jobless recovery. So this is where the what seems to happen where we start to have a recovery and expansion. However, so we're going through a period of growth. So we're going through an expansion and this tends to happen right after a recession where we're going through an expansion. However, the unemployment rate Is still rising and that's called a jobless recovery because we're starting to see growth again where we're starting to see production grow again. However, there's still unemployment. Uh the unemployment problem is not getting fixed and this happened during actually each of the last three recessions since 1990. So when you go back up to the chart, there were jobless recoveries after each of the three last recessions since 1990. Alright so that's about it here. These are some key facts to remember about the business cycle. Let's go ahead and move on to the next video