The business cycle is the time is takes the economy to go through all four phases of the cycle: expansion, peak, contraction, and trough.

1. Changes in Demand
• Keynes economists believe that a change in demand
causes a change in the economic activities.
• When the demand in an economy increases the firms
start producing more goods to meet the demand.
• There is more output, more employment, more income,
and higher profits. This will lead to a boom in the
economy. But excessive demand may also cause inflation.
• On the other hand, if the demand falls, so does the
economic activity.
• This may lead to a bust, which if it continues for a longer
period of time may even lead to depression in the
economy.

2. Fluctuations
in
Investments
Just as fluctuations in demand, fluctuations in
investment is one of the main causes of business
cycles.
The investments will fluctuate on the basis of a lot of
factors such as the rate of interest in the economy,
entrepreneurial interest, profit expectation, etc.
An increase in investment will lead to an increase in
economic activities and cause expansion.
A decrease in investment will have the opposite effect
and may cause a trough or even depression

3. Macroeconomic
Policies
• The monetary policies and the economic
policies of a nation will also result in
changes in the phases of a business cycle.
• So if the monetary policies are looking to
expand economic activities by promoting
investment, then the economy booms.
• On the other hand, if there is an increase
in taxes or interest rates we will see a
slowdown or a recession in the economy.

4. Supply of Money
• There is another belief that says that
business cycles are purely monetary
phenomena.
• So changes in the money supply will
bring about the trade cycles.
• An increase of money in the market
will cause growth and expansion.
• But too much money supply may also
cause inflation which is adverse.
• And the decrease in the supply of
money will initiate a recession in the
economy.

5. External Causes of Business
Cycles
Wars
• During times of wars and unrest, the economic resources
are put to use to make special goods like weapons, arms,
and other such war goods.
• The focus shifts from consumer products and capital goods.
This will lead to a fall in income, employment, and
economic activity. So the economy will face a downturn
during war times.
• And later post-war the focus will be on rebuilding.
Infrastructure needs to be reconstructed (houses, roads,
bridges, etc).
• This will help the economy pick up again as progress is
being made. Economic activity will increase as effective
demand will increase.

6. Technology Shocks
• Some exciting and new technology is
always a boost to the economy. New
technology will mean new investment,
increased employment, and
subsequently higher incomes and
profits.
• For example, the invention of the
modern mobile phone was the reason
for a huge boost in the telecom industry.

7. Natural Factors
• Natural disasters like floods, droughts,
hurricanes, etc can cause damage to the crops
and huge losses to the agricultural sector.
• Shortage of food will cause a surge in prices
and high inflation. Capital goods may see a
demand reduction as well.

8. Population Expansion
• If the population growth is out of
control that might be a problem for the
economy.
• Basically of the population growth is
higher than the economic growth the
total savings of an economy will start
dwindling.
• Then the investments will reduce as
well and the economy will face
depression or a slow down.

9. Business Cycle Indicators
(BCI): Meaning and Indicators
• Business cycle indicators (BCI) are a composite
of leading, coincident, and lagging indexes
created by the Conference Board and used to
forecast, date, and confirm changes in the
direction of the overall economy of a country.
• Various public and private organizations collect
and analyze economic data and statistics to
construct and track BCI.

10. Leading Business Cycle
Indicators
• Leading indicators measure economic activity
in which shifts may predict the onset of a
business cycle.
• Components of the index of leading indicators
include average weekly work hours in
manufacturing, factory orders for goods,
housing permits, and stock prices.
• Changes in these metrics could signal a shift
in the business cycle.

11. Lagging Business
Cycle Indicators
• Lagging indicators confirm
the trend that leading indicators
predict.
• Lagging indicators shift after an
economy has entered a period of
fluctuation.

12. Coincident Business
Cycle Indicators
• Coincident indicators
are aggregate measures of
economic activity that shift as
a business cycle progresses.6
Examples of coincident index
components include the
unemployment rate, personal
income levels, and industrial
production.

13. What Is Monetary
Policy?
• Monetary policy is a set of tools used by a nation's
central bank to control the overall money supply and
promote economic growth and employ strategies such
as revising interest rates and changing bank reserve
requirements.
• Monetary policy is a set of actions to control a nation's
overall money supply and achieve economic growth.
• Monetary policy strategies include revising interest rates
and changing bank reserve requirements.
• Monetary policy is commonly classified as either
expansionary or contractionary.
• The Federal Reserve commonly uses three strategies for
monetary policy including reserve requirements, the
discount rate, and open market operations.

14. Types of Monetary Policy
• Monetary policies are seen as either expansionary or
contractionary depending on the level of growth or
stagnation within the economy.
Contractionary
• A contractionary policy increases interest rates and limits
the outstanding money supply to slow growth and
decrease inflation, where the prices of goods and services
in an economy rise and reduce the purchasing power of
money.
Expansionary
• During times of slowdown or a recession, an expansionary
policy grows economic activity. By lowering interest rates,
saving becomes less attractive, and consumer spending
and borrowing increase.