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    Business cycles and the current state of the economy.

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    Read the two articles below and do some of your own research on current macro-economic conditions and the business cycle. National economic data are available from the U.S. Department of Commerce, Bureau of Economic Analysis www.bea.gov

    Yellen, Janet L. "Prospects for the Economy in 2008," Economic Letter, Federal Reserve Bank of San Francisco, Accessed February 8, 2008, at: http://www.frbsf.org/publications/economics/letter/2008/el2008-04-05.html#2

    "Economics focus: Beyond the business cycle?" The Economist London, October 23, 1999. Article Attached.

    In a 2 page double spaced paper, please focus on the following questions.

    1. The U.S. has not experienced a recession since 2001. Define a recession and indicate whether you think another one is on the horizon? If yes, give your reasons for why a recession might occur. If you are an optimist, why do you think another recession is not on the way? Use the Yellen article as a foundation for your report.

    2. Pick two factors cited in The Economist article that you think will have the most impact on future business cycles. Explain why they are important and whether you think they will contribute to more severe or less severe business cycles.

    3. Do you think the business cycle is dead? Why or why not?

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    Solution Preview

    You will need to decide for yourself whether the business cycle is still valid. There are good reasons for both arguments. I will explain the ones in these articles, and you can decide which ones seem more compelling to you. Remember, a recession is defined as two consecutive quarters of falling GDP. During the 4th Quarter of 2007 GDP grew 0.6%, which is small but still positive. During the first quarter of 2008, preliminary estimates place it at positive 0.9%. But, regardless of whether we experience a recession in the near future, the question at hand is whether they are still possible at all.

    To begin your essay, you could state the opposite position to build interest. For example, if you don't believe that business cycles are still relevant, you could state that business cycles have been a foundational component of economics for generations, and people are reluctant to abandon them. However, evidence mounts that they are no longer present in the same forms as in the past.

    The Yellen article focuses on monetary policy - specifically the reasons for the Fed's recent lowering of interest rates. The implication seems to be that the Fed has successfully warded off a recession with these actions. The article then discusses how mortgage crisis has affected financial institutions. Then, she describes how this could ...