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The business cycle refers to the upward and downward movement of aggregate output produced in an economy overtime.It consists of periods of ,
expansions(growth) and recessions(decline)in economic activity.
During an Expansions aggregate output which is the total production of goods and services increases.Unemployment falls and economic activity strengthens.
During a recession,aggregate output falls, unemployment rises and economic activity weakens.
The cycle repeats as the economy moves through phases of growth and contraction.Business cycle affect employment levels.For example,during recessions,unemployment rises significantly.
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Business cycle,what happen during business cycle expansion using the bond market analysis?
Income and wealth increases which raising demand for bonds as investors seek to invest their additional funds.Higher demand shift the bond demand curve rightward raising bond prices and thus lowering interest rates.However,businesses increase investment borrowing,increasing bond supply which can raise interest rates.
overall,interest rates tend to rise during expansions because the increased demand for funds outweigh supply shifts.(Bond demand rise,price rise and interest rate ,lowering interest rate)
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The factors that influence the supply curve to shift: 1. Expected profitability of investment opportunities –if the investment is profitable, the firms are willing to borrow in order to finance the investment. The quantity of bonds supplied increased. In an expansion, investment opportunities are expected to be profitable. Supply of bond increase and the supply curve shifts to the right. If the economy facing recession, the expected profitable investment are low, supply of bond decrease and the supply curve shift to the left.
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Expected inflation – if the expected inflation increased, the real interest rate falls. The cost of borrowing decreased. The supply of bond increase and supply curve shift to the right. But, if the expected inflation decreased, the real interest rate is higher. The cost of borrowing increased. It will reduce the supply of bond and the supply curve shift to the left. An increase in the expected inflation reduces the value of existing bonds and raises borrowers’ willingness to supply bonds at any bond price. The SS curve shifts to the right, reducing the price of bonds and increasing the interest rate
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Government activities/borrowing – decision by governments can affect bond prices and interest rates in the economy. When government is in deficit, the BNM will issue bond to finance the deficit. The supply of bond increased and the supply curve shift to the right, reducing the price of bonds and increasing the interest rate. When government have surplus, they will reduce the supply of bond in market, the supply curve shift to the left, increasing the price of bonds and decreasing the interest rate.
