Macroeconomics studies the patterns and trends affecting the entire economy, including business cycles. Keynesian and classical macroeconomists analyze trends such as expansion, contraction, and depression. Full employment, GDP, and unemployment rates are used as indicators. Government intervention is advocated by Keynesians during times of economic contraction, while classical macroeconomists oppose it.
Business cycles are studied in macroeconomics. Unlike microeconomics, which focuses on the consumption and production patterns of individuals, businesses, and government entities, macroeconomics examines the patterns and trends affecting the entire economy. Economic growth and decline represent business cycles commonly associated with the general state of the economy of a country or region and are best suited to macroeconomic study.
Macroeconomics and business cycles are interdependent. Trends associated with business cycles such as expansion, contraction and depression are monitored and analyzed by two types of macroeconomists: Keynesian and classical. The causes of business cycles can be linked to aspects of macroeconomics such as full employment and inflation. Economic models and terms such as Okun’s law, gross domestic product (GDP), and unemployment rates are often used in the study of macroeconomics and business cycles.
Expansion is sustained economic growth for six months or more due to capital investment in enterprises or equipment; technological advances that help people get their jobs done faster and more efficiently are also fueling economic growth. Macroeconomics defines a contraction, or recession, as a period of economic decline that lasts longer than six months. This is characterized by job losses or lack of consumer spending. A depression is a sustained contraction of the economy.
Keynesians believe that problems associated with macroeconomics and business cycles can be controlled or resolved by government intervention. For example, during times of economic contraction, Keynesians advocate lower taxes and increased government spending to stimulate economic growth. Classical macroeconomists oppose government intervention and believe that the natural law of supply and demand will solve any problems associated with the business cycle.
Full employment means that all factors of production such as capital, technology and people are used as efficiently as possible. It is associated with economic expansion and is supported by population increases and technological improvements. Increased government or consumer spending also leads to economic growth. As consumer demand for goods and services increases, more jobs are created and workers’ wages rise. If this type of spending continues, however, prices could get too high, leading to inflation. This reduces consumer spending, causing a drop in wages and job availability.
When studying macroeconomics and business cycles, economists use GDP and unemployment as indicators. GDP measures the total value of all goods and services produced by a country or region. During periods of economic growth, GDP increases and the unemployment rate decreases. Okun’s law, a macroeconomic formula, states that for every one percent increase in GDP, unemployment decreases by half a percent. Alternatively, high levels of unemployment indicate an economic contraction.
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