The business cycle consists of alternating periods of economic growth and contraction (Tucker, 2008). A key measure of the business cycle is the rise and fall in real gross domestic product. There are four phases in a business cycle each of which varies in terms of the duration of time it lasts. These phases and their relation to GDP are: Peak: this is the point at which GDP is at a maximum. During the peak period of the business cycle, there is full employment and production is at its maximum. It is evident that the real GDP of any given state is principally high. Recession: at this point the GDP is declining and there is a downturn in the business cycle. It is also referred to as a contraction.
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Trough: this is the lowest point of the business cycle and the GDP is at a minimum. Recovery: an upturn in the business cycle. During this phase, GDP is rising, and there is an expansion in the economy. There is increasing productivity, improving profits and employment rises. Indicators of GDP such as employment, production capacity, poverty levels move with the business cycle and can be used to measure it as well. Other indicators of GDP that is useful for the measurement of the business cycle include: interest rates, stock prices, money supply, consumer expectations, unemployment rate, and duration of employment and labor costs per unit of output.
Government plays the central role in determining the fiscal policy of the country. This it does though several agencies such as the department of treasury, the office of management and budget, the office of the president and the government accountability office. Each of these offices has a role to play in the overall fiscal policy implementation.
Fiscal policies generally refer to government actions aimed at development and stabilization of the economy. It is the use of government budget to influence economic activity, by affecting the level of aggregate demand in the economy. The aim of such policies is to achieve price stability, contain inflation, full employment and economic growth. The major elements of fiscal policy are taxation and government budget.
The government bodies' roles are:
They evaluate the effectiveness of agency programs, various policies; assess competing funding demands and set finding priorities. They also ensure that reports, rules and proposed legislation are consistent budget and administration policies. The government manages the overall pace of economic activity especially checking the price level and unemployment rates. Through the fiscal policy, government determines the appropriate levels of taxes and spending. The president proposes a budget to Congress, which in turn evaluates the spending plan and considers individual appropriations bills shoeing exactly how the money will be spent.
Fiscal policies have far reaching effects on both individual's behaviour and at a macro economic level. Increasing rates of taxation, will lead to lower production as firms focus on declining profitability, they are less inclined to put more effort into production. Thus production capacity declines. When interest rates are adjusted, they can have either positive or negative effects on production. High interest rates lead to less credit and money becomes scarce and so production declines. On the other hand, when interest rates decline, cash becomes more available to be channeled into production. Thus production increases.
On employment, fiscal policies have effects both to the firms and the individuals. High taxes may be perceived by individuals as a form of punishment, and this can lead to promotion of more black market labor rather than formal employment. Thus employment may be perceived to be declining (Milakovich, 2007). Changes in fiscal policies have far reaching effects on the intensity of employment, overall efficiency and productivity. Firms may decide to cut down on the number of people employed and this may in turn lead to high unemployment rates.
Government spending refers to the Budget and together with taxes affects production and employment either positively or negatively. To ensure well functioning markets, the government must expend resources. However, at some level of government spending, the impact on production of goods and services is negative. Excessive government spending weakens the economy and makes everybody poorer and may lead to gross indebtedness.
Some of the positive effects include improving the revenue base of the government leading to faster growth hence more employment. Development of infrastructure and other capital investments can also be undertaken faster with increased revenues from taxation. It therefore matters where government spending is emphasized. Public investment on roads, ports and communication and technology infrastructure greatly compliments private investment which in turn stimulates economic productivity.
However, when government takes a lot of money from private companies in terms of taxes and does not spend it wisely then problems are exacerbated. Some of these negative effects are: