MacroeconomicsI_working_version (1)

40
Chapter 5
5.3. Types of Business Cycles
Minor or short-term business cycles are associated with the fluctuations in inventory
investment and production in stock. The length: 36 – 40 months. (Sometimes called the
Kitchin cycles according to Josef Kitchin, a South African statistician and economist).
Middle term or Juglar cycles are connected with the fluctuations in investment spending.
The length: 7 – 10 years. (Clement Juglar, a 19 th -century French physician.)
Long term or long-wave cycles so-called Kuznets cycles involve fluctuations in the
supply trends of resources, and the productivity and efficiency, with which they are used,
last about 25 years. The longest type of fluctuation is called Kondratieff cycle. That type
of a cycle is connected with technological changes and political affairs. (Simon Kuznets
was a Russian born US economist who received the Nobel Prize for his work on growth.
Russian economist Nikolai Kondratieff developed his theory of long-wave cycles in the
1920s before he was arrested and disappeared; the official Soviet Encyclopaedia then wrote
about his work: “this theory is wrong and reactionary”.)
5.4. Impulses in the AS – AD Model: Business Cycles of
Demand Side and Supply Side
The previous lessons showed us how to use the AS – AD model to understand the basic
determinants of output, unemployment and inflation (in the short and long run). The model
can also be used to study business cycles. The point of departure is to identify the factors
(sometimes called shocks) that shift either the AS or AD curve. Demand shocks shift the
AD schedule, while supply shocks affect the position of the AS curve. Both demand and
supply shocks can be positive or negative. Positive shocks, for example, move the relevant
schedule rightwards.
5.4.1. Demand Side Business Cycles
The movements (shifts) of aggregate demand cause this type of fluctuations of actual
output around its potential.
Let’s assume the initial equilibrium in point E – the point of intersection of the AS and AD
curves. The actual output equals the potential output in that point. If the investment activity
or the amount of consumers’ spending falls, the aggregate demand decreases and moves
leftwards. See the new point of equilibrium in Figure 5.2.