Business Cycle and Fiscal Policy

Topics: Monetary policy, Macroeconomics, Unemployment Pages: 2 (448 words) Published: January 23, 2011
Gross Domestic Product (GDP) Used to Measure the Business Cycle

Gross Domestic Product (GDP) is used quarterly as an indicator of economic activity to measure the business cycle. A business cycle is when there are periods of economic growth and periods of economic decline. A business cycle consists of four stages, contraction, recession, expansion, and peak. Contraction is when the economy starts to slow down. When a contraction begins to occur the Federal Reserve will lower interest rates with the hopes a expansion, growth in the economy, will occur. The time between a contraction and a expansion can be viewed as a recession, when the economy hits bottom, because consumers do not want to spend money and need to be enticed by the government with low interest rates. The Federal Reserve will raise interest rates during a expansion to avoid a peak from occurring in the fear of the stock market collapsing. The GDP is used to determine by the Federal Reserve when to change interest rates in the economic market (Amadeo, 2010).

Fiscal Policy

The government bodies that determine the national fiscal policies are the president and Congress. Each government body has a different approach to the economy and the role the national fiscal policies influence the direction of the economy. There is a direct effect from fiscal policies on the economy’s production and employment. For example, if the government wants to repair highways this would create more employment; therefore, there would be a direct effect on the production of the supplies. In addition, the economy would be stimulated because jobs have been created and consumers can begin to purchase goods and services. This example has a positive effect on government spending and taxes. The negative effect is when the government spends too much revenue and their needs to be an increase in tax rates. When tax rates are increased consumers will not spend money resulting in minimal economic growth...

References: Amadeo, K. (2010, January 3). Business cycle. Retrieved from
Smith, S.E. What is fiscal policy? [Web log message]. Retrieved from
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