In periods of recession, economic activity drops down to almost null - at the end of both the consumers and the business owners; buying, selling, production and employment are at their lowest. The severity of recession is known as depression.
When recession eases and the economy takes an opposite direction to take an upturn towards better financial prospects, there emerges the hope of recovery. It can be considered as the transition phase which leads to growth.
As the trough advances towards the peak, the era of growth begins; the consumer confidence increases and business activity starts to pick up - since employment is generated, income of the citizens increase and hence increasing demand and hence production levels picking up and so the cycle continues. But, this activity period is coupled with increasing price levels.
The boom does not last forever, even healthy economies face worst. Like recovery, this is a transition period where economy starts to move towards the bottom. Consumer purchases lowers, demand weakens and hence business activity starts to fall.
There are multiple reasons that lead to changes in the levels of the economic activity - volatility of investment spending, momentum or follow the herd strategy of the consumers, technological innovation, varying inventory levels, fluctuation in government spending, effect of political conditions on business cycles, monetary policy, change in import and export situations, etc (Knoop, 2004)ii.
The global financial crisis all started with the panic emerging in the banking system, with need to nationalize the banks. The credit system was affected with consumers and businesses facing difficulty in obtaining credit, housing market was highly affected. Thus, activity dropped hugely; there was fall in profits of many companies, pessimism and loss of confidence, net worth of businesses declined, and businesses precipitating into bankruptcies. This era can be characterized as Recession.
(b) What are the key differences between the Classical and the Keynesian point of views Which of these frameworks has the Australian government been favouring in the global financial current crisis of 2008 and 2009
Classical economics believe that market will adjust itself and has its basis on Say's Law - people supply things to the economy and in return receive income to demand things of the value they have supplied. With regards to unemployment it is believed that unemployment is caused by excess supply due to higher wage levels. Classical economists therefore say that when left on its own, equilibrium wage levels will be achieved and economy will be at a full employment.
In 1936, John Meynard Keynes, emphasized the role of the government for stabilizing the economic output over the different business cycle. He pointed out that the private sector decisions can lead to the inefficient macroeconomic outcomes, whereas public sector interference via monetary policy and fiscal policy can lead to positive outcomes. Since individuals and institutions, lead to micro level decisions which leads to economy operating below its potential output and growth. Therefore, economy should be stimulated by reducing interest rates, investing in the infrastructure by the government. This helps in economic activity to pick up. Cheaper credit will be available for businesses to fund their capital requirements