Expansion
Candlefocus EditorInterest rates play an important role in the expansion phase. Central banks like the Federal Reserve typically lower interest rates during an expansion to promote economic growth. Low rates, combined with an anticipation of growth, encourages businesses to invest more in capital projects, expand their operation, and hire new workers. These efforts bolster economic growth, leading to increased investment, increased production, and increased employment, all of which help the economy improve.
Capital expenditure is another significant factor during the expansion phase. As businesses invest in new equipment and materials, they create additional economic output and employment, both crucial components of an expansion. The increased investment by businesses, combined with the lowered interest rates, creates a virtuous cycle of higher consumer spending and increased investment. The increased production and consumer demand throughout the economy boosts profits, which, in turn, fuel more investments, leading to further growth and job creation.
Furthermore, during the expansion phase, consumer prices can rise due to increased demand. This can cause a level of inflation that can have a disruptive effect on the economy. In response, the government may raise taxes, reduce transaction costs and increase wages, all of which have the potential to slow the growth rate.
The expansion phase is essential for maintaining economic growth, but it can also become quite volatile. To be prepared for the potential loops and swings of the economy, investors should closely watch interest rates and capital expenditure. By so doing, they can better predict where the business cycle is heading, better understand the shift in economic trends, and develop an appropriate investment strategy.