The Business Cycle and Policy Response in UK - Coursework Example

This paper will examine closely the business cycle properties of the UK and government policy through assessment of the role of GDP and monetary policy conditions in modeling the cycle. Figure 1 Accessed on October 22, 2011 from, http://www.marketoracle.co.uk/images/2008/uk-GDP-growth-and-house-prices-feb08.jpg Figure 2 Accessed on October 22, 2011 from, http://tutor2u.net/economics/revision-notes/macro-uk-economic-cycle_clip_image002.gif There are definitional uncertainties that inevitably hamper GDP and its patterns decomposing into cycles and other components like circular flow.

Figure 2 is a representation of the UK’s economy annual growth since 1980. Evident in the chart, two recessions have been experienced for the last 25 years. UK experienced the worst downturn in the 1980s. Later between 1990 and 1991, a recession was then followed by cumulative positive economic growth. The 1990s economic growth remains the longest period of economic expansion before the slowdown that was experienced in 2005. Not UK alone, but all other countries experience an economic cycle that causes national output and unemployment to fluctuate in a notable manner.

Worth noting, the two main concerns of economic are growth and stabilization. As evident in the graphs, devising government policies have a considerable interest towards influencing the prospects for the growth of the economy and mitigate the frustrations associated the downturns. It is important to evaluate the benefits and costs of any policy with knowledge of the growth and business cycle determinants (Mankiw & Taylor, 2006:405). For the last few years, theoretical and empirical researches have undergone an explosion into growth of the economy.

For the theoretical part, there have emerged two economic growth determinants. The first is human capital in which abilities, skills, and knowhow of workers are comprised. From this idea, regular improvement of stock of human capital is the fundamental base for economic growth. In other words, there is need to improve stock of human capital if at all the output of the good being produced are to increase for a fixed quantity of workers. Evidently, there exist a homogeneous impact between economic ability to produce goods and growth resulting from the accumulation of human capital.

The second is research and development since growth can be realized if returns are non-decreasing. As technology advances as a result of research and development result to a consequential increase in production of the factors of production. Economists believe that changes in technology homogeneously impact produced goods. According to OECD Publishing (2007:23), the fact that there are fluctuation of production, changes in incomes, and changes in spending habits over time means that business cycle must be experienced.

As the structure of economy evolves, the cycles will change thus GDP will influence these cycles. The business cycle in the country has been unstable due to the fluctuations caused by inflation. The increased costs of energy have contributed increasingly to the high rate of inflation, which soared from 4.2% in August 2011 to 5.2% September 2011. Being followed by a sharp downward trend, cutting down interest rates became the only tool to boost the economy and prevent any further financial