Macroeconomics Report on Business Cycle and Monetary Policy Analysis

This report provides an overview of key macroeconomic concepts, focusing on the business cycle and monetary policy. It begins by defining and illustrating the different phases of the business cycle, including expansion, peak, contraction, and trough, and uses a diagram to demonstrate these phases. The report then explains monetary policy, distinguishing between expansionary and contractionary monetary policies. It illustrates how expansionary monetary policy, through lowering interest rates or increasing money supply, can boost aggregate demand and combat depression. Conversely, it describes how contractionary monetary policy, by raising interest rates or reducing money supply, can help control inflation. The report also includes diagrams to visualize the impact of both expansionary and contractionary monetary policies. The report serves as an educational resource, summarizing complex economic principles in a clear and concise manner.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Author Note

1MACROECONOMICS
Table of Contents
Concept of Business Cycle.........................................................................................................2
Concept of Monetary Policy......................................................................................................3

2MACROECONOMICS
Concept of Business Cycle
Business cycle refers to the cyclical fluctuation in economic activities measured in
terms of total production and total employment. The cyclical fluctuations that the economy
experiences are divided into four different phases – Expansion, Peak, Recession and Trough.
Expansion: The expansionary phase of business cycle is characterized as a period when the
economy experiences continuous expansion in terms of growth and employment.
Peak: Continuous expansion helps the economy to reach the peak level where it achieves
highest level of economic growth. The actual output then equals potential output and the
economy operates almost at full employment.
Contraction: The period of economic boom is followed by a period of contraction where the
growth rate, price level and employment rate gradually falls.
Trough: Gradual economic contraction leads the economy towards the lowest level of
economic production and employment. This phase is termed as trough or period of economic
depression.

3MACROECONOMICS
Figure 1: Phases of business cycle
Concept of Monetary Policy
Monetary policy is one of the major policy instrument used for stabilizing economic
activities. Central bank of a nation designs monetary policy using instruments like money
supply and interest rate. Depending on state of the economy, monetary policy is of two types
– expansionary monetary policy and contractionary monetary policy.
The expansionary monetary policy is implemented when economy suffers from
depression. The policy is taken either by reducing the rate of interest or by raising money
supply. Lower interest rate boosts aggregate demand by increasing investment.

4MACROECONOMICS
Figure 2: Impact of expansionary monetary policy
The contractionary monetary policy is adopted when the economy suffers from over-
inflationary situation. Here, the policy is either to bring down the money supply or to raise
the interest rate which helps in combating inflation in terms of lowering investment and
aggregate demand.
Figure 3: Impact of contractionary monetary policy