The economic cycle is a fundamental economic understanding of the phases that an economy may experience during certain climates. This can be understood by the basic economic cycle diagram, which shows the different periods combined with a line representing trend growth. Governments ideally wish for uniform growth, close to or on the trend line, this is where the economy is continually expanding and growing at a rate which the government perceives to be sustainable. For example, the UK aim for 2.5% trend growth, however due to the economic cycle we can understand that it rarely stays at one point for a long period of time. When the actual growth line is above trend rate, this is known as a positive output gap and when the actual growth line
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Similarly to this, a recession can be combatted and forced into recovery by both monetary and fiscal policy. Monetary policy would focus on decreasing the money supply in order to stimulate the economy whereas fiscal supply focuses on government spending and tax. A reduce in taxes such as income tax would work in theory to get people back to work and therefore push out the PPB to potentially develop economic growth. As previously mentioned, it is possible for the government to stimulate aggregate demand using monetary policy, via a reduction in interest rates, however this does not come without its own problems, it leads to potential speculation of increasing price levels and inflation.
However recessions and potential busts can be created in many numerous different ways, one of which previously just mentioned in terms of speculation. Speculative bubbles work via the communication of the consumer, for example, the Housing market was massively published and conversed about to rise dramatically over the coming years. This forced people to purchase houses there and then in the hope that they will be provided with a better price now than they would in the future, due to speculation they were correct in doing so. Such speculation skyrockets demand and with it too comes price levels, this is a common cause of a recessionary