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What Is the Connection between Macroeconomics and Business Cycles?

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  • Written By: A. Garrett
  • Edited By: John Allen
  • Last Modified Date: 02 September 2016
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Business cycles are studied in macroeconomics. Unlike microeconomics, which focuses on the consumption and production patterns of individual people, businesses, and government entities, macroeconomics examines patterns and trends affecting the economy as a whole. Economic growth and decline represent business cycles commonly associated with the overall state of a country or region's economy and are better suited for 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 macro-economists: 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 economic growth sustained for six months or longer due to investments of capital in businesses or equipment; technological advancements that help people do their jobs faster of more efficiently also fuel economic growth. Macroeconomics defines contraction, or recession, as a period of economic decline lasting for more than six months. This is marked by job loss or lack of consumer spending. A depression is a prolonged contraction of the economy.

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Keynesians believe issues associated with macroeconomics and business cycles can be controlled or resolved by government intervention. For example, during periods of economic contraction, Keynesians advocate lower taxes and increased government spending to stimulate economic growth. Classical macro-economists oppose government intervention and believe the natural law of supply and demand will resolve any issues associated with the business cycle.

Full employment means all factors of production such as capital, technology, and people are being used in the most efficient manner possible. It is associated with economic expansion and is bolstered by increases in population and improvements in technology. Increases in consumer or government spending also lead to economic growth. As consumer demand for goods and services increases, more jobs are created and the salaries of workers increase. If this sort of spending continues, however, prices may become too high, leading to inflation. This decreases consumer spending, causing a fall in wages and the availability of jobs.

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 rises and unemployment rates fall. Okun's law, a macroeconomic formula, states that for every one percent increase in GDP, unemployment falls by half a percent. Alternatively, high levels of unemployment indicate economic contraction.

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