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Chapter 4

Trade Cycles

Stage Recession Stagflation Recovery Boom

Output Falling Falling Starts to rise High

Unemploy. t High and rising High and rising Starts to fall Low

Inflationary Reduced Increasing Moderate High and rising
pressure

Cause Falling AD Supply side Returning High and rising
shocks confidence AD
OR
OR Government
World recession expansionary
Low AD + policy
imported cost-
push inflation

Solution Increase AD – Supply side Reduction in Reduce AD –
e.g. boost G policies expansionary e.g. increase T
and cut T policy to reduce and cut G
OR risk of boom,
Cut interest increase T and Raise interest
rates Prices and cut G rates
incomes policy
Raise interest
rates

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