Business Cycles and Recession

The primary determinant of economic activity is real GDP. The relationship between the real gross domestic product and the potential GDP is a good measure of the performance of the economy relative to the potential. Analyze the GDP data and comment on U.S. recessions since the World War II. Answer the following questions:

• How many recessions have there been since 1949?
• What has been the longest time between recessions?
• Have the severity of recessions decreased over the period after World War II?

To answer these questions, use the following information and do the additional reading given below.

The Business Cycle Dating Committee of the National Bureau of Economic Research is the group that defines when the U.S. economy is in a recession or expansion period. The Committee uses the following definitions: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”

Go to the National Bureau of Economic Research (Links to an external site.)Links to an external site. (NBER) to identify when business cycles occurred during the period after World War II.

Go to the St. Louis Federal Reserve website and use the data on real GDP and potential GDP to answer the questions about the severity of recessions:

• Real Potential Gross Domestic Product (Links to an external site.)Links to an external site.
• Real Gross Domestic Product (Links to an external site.)Links to an external site.

Measures of severity might be the ratio of actual-to-potential real GDP, how far GDP fell, how long it fell, and how quickly it fell.

Part 2

At the end of this activity, you will have examined the effectiveness of stabilization policies. Macroeconomics grew out of attempts to explain recurrent fluctuations in economic activity, that is, business cycle theories. The length of adjustment time and the economic impact of that adjustment is the subject of much debate among economists. Economists have proposed many policies to reduce the fluctuations in real gross domestic product due to the business cycle. Consider whether stabilization policies have reduced the severity of business cycles.

Answer the following questions:

• What are the important elements of stabilization policies
• Have the stabilization policies been effective?