Question

Suppose the economy is hit by a negative business cycle shock. Using a supply and demand framework, describe the propagation mechanism in Sticky Price Theory through the labor market. Explain.

Answer 1

Business cycle is crucial for all businesses because it directly effect the demand of the product.it contain 4 phases

1.Boom:high level of consumer spending business confidence ,profit ,investment

2.Recession:falling level of consumer spending and confidence means lower profit for business

3.Depression:very weak consumer spending and business investment

4.Recovery:consumer start to increase spending .business feel a little more confident and start to invest again

Any change to fundamental macroeconomic variables that make negative impact to macroeconomic outcomes and measures of economic performance such as inflation.it is unperdictable.economic shock effect the economy and the root cause of recession and economic cycle in real business cycle theory.