Business cycles
From WikiTextbook
However well a business manages its own activities, its success will depend on conditions in the economy as a whole. The government is expected to manage the economy so that businesses can confidently plan their future activities and customers can plan their spending and saving activities. They will do this by tying to guide the economy close to the average growth line, where future growth is predictable rather than follow the unpredictable boom/recession path.
The stage in the business cycle
Most economies have a businesses cycle where the economy moves from periods of growth (boom) to periods of decline (recession).
Recession During a recession people will be buying fewer goods and services. This will cause businesses to cut back on the amount they produce. This means that businesses will not need as many workers so they may make some of them redundant. The problem now is that with fewer people working demand will fall even further as people are unable to afford to buy goods and services. Recessions are bad for businesses as their sales will fall. Recessions are also bad for customers because there is a greater chance they will lose their job.
The government will try and get the economy out of a recession by spending lots of money so businesses will have somebody to sell their goods and services to. It is also possible that the government may lower taxes so people have more money to spend.
Boom
During a boom people will be buying more and more goods and services. Businesses will employ more people as they try and produce enough to satisfy the demands of the market. As more people are in work they will have more money to spend. This adds to the demand in the economy for goods and services. Businesses will increase their prices as they know people have more money and are prepared to pay higher prices.
If the boom gets out of control and prices are rising too quickly the government may put up taxes to people have less money to spend.
