Exercise Set 6.7
BUSINESS CYCLES

I. Objectives

• To understand what a business cycle is
• To look at the history of economic fluctuations
• To understand what governments can do about business cycles

II. Defining a Business Cycle is Not Easy

From the NBER's website http://www.nber.org/cycles/recessions.html (emphasis added):

The NBER's Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology comprises alternating dates of peaks and troughs in economic activity. A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.

http://www.mrmikeseconsite.co.cc/apmacro

Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.

In both recessions and expansions, brief reversals in economic activity may occur-a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP). The Committee's use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs. Use the Consumer Price Index levels for two successive periods and compute the inflation rate.

III. Questions

1. Go to the NBER website at http://www.nber.org/cycles.html (opens in a new window). 
1. How long did each of the following recessions last? (Use Duration for Contraction: Peak to Trough)
1. The Great Depression (1929-1933): __________ months
2. The 1980s recession (1981-1982): __________ months
3. The "Great Recession" (2007-09): __________ months
2. Consider three periods: The pre-WWI period (1854-1919), the period between the World Wars (1919-1945), post-WWII period (1945-2009). 
1. In each period, what was the average duration of a contraction (in months)?
2. Have recessions been getting longer, or shorter, over time? What might be the reason for this?
2. Changes in taxes or government spending constitute [ fiscal / monetary / trade ] policy, and are under the control of the [ President and Congress / Federal Reserve / Supreme Court ].
3. A change in money supply (or interest rates) constitutes [ fiscal / monetary / trade ] policy, and is under the control of the [ President and Congress / Federal Reserve / Supreme Court ].
4. Business cycles refer to fluctuations in economic activity over the [ short run / long run ].
5. Classical economists generally regarded economies as self-regulating. This meant that, in times of recession, they preferred the government to [ use fiscal policies / use monetary policies / do nothing ].
6. Keynesian economists suggest that, in times of recession, governments should generally [ use fiscal or monetary policies / do nothing ]. 
7. According to a generally accepted definition, a recession is said to occur when the economy experiences _________ quarters, or _________ months, of falling GDP. Note that this does not always coincide with NBER's definition: see http://www.nber.org/cycles/recessions_faq.html.