Learning Team Deliverable Week 4 Essay

TA-4D) Recessions seem to show up every so often and create economic hardship. One might think that macroeconomic policymakers could tame the business cycle and implement policies that would end recessions. Are recessions a necessary fact of macroeconomic life? If not, what would it take to eliminate them? If they are unavoidable, what types of business can benefit from them? How would a recession affect your firm? Economists identify business fluctuations in the economy by measuring the Gross Domestic Product (GDP) output. This fluctuation of output is called the business cycle. McConnell (2009) states, â€Å"Many economist prefer to talk of business fluctuations rather than cycles because cycles imply regularity while fluctuations do not (p. 984). The business cycle is distinguished by four phases: Peak, Recession, Trough, and Expansion, always starting with the peak (McConnell, 2009). The motion of the business cycle propels with alternating rises and declines in the level of economic activity with each portion varying on duration and intensity. At the peak of the cycle, business activity has reached a temporary maximum. Here the economy is at full employment and the real output is close to the economy’s capacity. With a price level rise during this phase, either resources or consumers will eventually dwindle causing a decrease in output. A decline in total output, income, and employment of the business cycle is called the recession period (McConnell, 2009). During a recession the GDP will decrease, manifesting a notable increase in unemployment which leads to economic hardships in many sectors of the economy. A macroeconomic policymaker could try to keep business activity at an equilibrium by reinforcing a policy framework for businesses to abide by. Examples to the policy framework could include pricing rules, along with having resources available to companies for production. Whatever the details of this policy framework, one still must consider that an expansion leads to recession, and vice versa. It is evitable. So yes, recessions are a necessary fact of macroeconomic life. Consider a farmer with crops in his field and his inability to stop a storm that wipes out his crop, or a business executive with the best business plan who is vulnerable to the fluctuations of the stock market. These examples reinforce that recessions are a necessary fact of macroeconomic life and they are unavoidable. The types of businesses that could benefit from a recession are companies providing nondurable goods or business with a combination of both durable and nondurable goods with the ability to bridge the output until the recession moves back into motion with an expansion. Consumers cannot postpone the buying of nondurables such as food; therefore recessions only slightly reduce nondurable output. The last recession hurt the high end retail optical business moderately because they carry such an expensive product to begin with sales dropped dramatically until people were comfortable with the economic situation again. Our company had to compensate for this decline by laying off over half of the corporate staff, between the periods of October of 2008 through April of 2009. We now operate with half the amount of employees and even though the economy has started to come back the company will not hire any new staff. Other ways the company compensated was forgoing any rate increases for everyone until 2010. Recessions definitely hurt companies that sell durable goods; however, it also forces companies to look how to trim the business and cut costs during the time of a recession. (TA-4C) Deflation has serious economic effects; deflation is the falling of prices, according to National Center for Policy Analysis, 2001) deflation can increase interest rates so the market rate minus the change in price. For example, if the prices fall six percent per year and the nominal interest rate is four percent, the real interest rate will calculate at ten percent. According to National Center for Policy Analysis, 2001) â€Å"Deflation is negative price inflation or a simultaneous fall in a broad range of prices for goods and services†. Deflation will raise current wages and can lead to major layoffs as employers try to reduce costs. Many organizations will need to reduce labor coast and because it is the quickest way to free cash flow layoffs will be the first to be considered. Deflation will also influence consumer spending because people become more conscious when spending creating a decrease in sales for businesses. One comely used method for reducing deflation is influencing the interest rates. The Federal Reserve influences interest rates to help cause the supply of money to change and create movement. When the supply of money changes it reduces major drops in inflation and deflation (Bernanke, 2002). Deflation can affect numerous businesses, for example Citicorp, although Citicorp is a large financial institution, a large number of the company’s employees are employed in the call centers. The call centers provide customer service for credit cards. With deflation people are more conscious with spending and are more focused on paying down debt, without the consumer spending on his or her credit cards Citicorp is forced to reduce customer service jobs. References Harvey, J. (2011). Why do recessions happen? A practical guide to the business cycle. Retrieved from http://www.forbes.com/sites/johntharvey/2011/04/18/why-do-recessions-happen-a- practical-guide-to-the-business-cycle/ on October 18, 2013. McConnell, C. (2009). Economics, principles, problems, and policies (18th ed.). New York: McGraw-Hill Company. National Center for Policy Analysis. (2001). Economic Problems of Deflation. Retrieved from http://www.ncpa.org/sub/dpd/index.php?Article_ID=7473 on October 20, 2013. Bernanke, G. B. S. (2002). Deflation: Making Sure â€Å"It† Doesn’t Happen Here. The Federal Reserve Board. Retrieved from http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm on October 20, 2013.