Seasonal Fluctuations . Over the course of several years, the economy routinely experiences a predictable pattern of boom (expansion), followed by bust (recession), followed by recovery that begins the pattern anew. While the government cannot prevent cyclical fluctuations, it can attempt to soften the booms and busts of the business cycle through monetary and fiscal policy. Structural Growth . In the long run, economic progress is not driven by random, seasonal, or cyclical fluctuations. Microeconomic policy changes can foster faster growth in labor, capital, and productivity at the margin. The Business Cycle

In the long run, economic growth is determined solely by the growth rate of productivity and capital and labor inputs that determine the overall production of goods and services—what is sometimes referred to as the "supply side" of the economy. In this scenario, faster economic growth can become "too much of a good thing" because it is unsustainable. Wages can temporarily rise faster than productivity, but the result would be rising inflation. As seen in Figure 2 , this view is not very accurate—consumption is actually one of the most stable components of spending. Long-term growth is often neglected by comparison, yet sustained, permanent, widespread increases in living standards depend on long-term growth, not the business cycle. In a recession, boosting short-term growth is mainly a question of finding ways to stimulate overall spending so that the economy operates at its productive capacity. Most economists believe that the information technology (IT) revolution has been responsible for the productivity growth rebound. Policy Implications

Policymakers' influence over economic activity is limited. Fiscal policy refers to changes in the budget deficit. Monetary policy refers to changes in short-term interest rates by the Federal Reserve. If recessions are usually caused by declines in aggregate spending, and the government can alter aggregate spending through changes in monetary and fiscal policy, then why is it that the government cannot use policy to prevent recessions from occurring in the first place? As discussed in the introduction, the rate of economic growth changes because of both changes in the business cycle and random fluctuations. Policies to Promote Long-Term Growth

As stated above, increases to the economy's productive capacity (or "supply side") are the key to long-term, sustained improvements in living standards. Other policy areas where good policy can foster higher long-term growth include education, taxation, competition, basic research, openness to trade, and infrastructure. The importance of the falling saving rate to long-term growth can be seen in recent capital investment levels, which have been below the historical average in this decade.
Economic growth can be caused by random fluctuations, seasonal fluctuations, changes in the business cycle, and long-term structural causes. Policy can influence the latter two.
Business cycles refer to the regular cyclical pattern of economic boom (expansions) and bust (recessions). Recessions are characterized by falling output and employment; at the opposite end of the spectrum is an "overheating" economy, characterized by unsustainably rapid economic growth and rising inflation. Capital investment spending is the most cyclical component of economic output, whereas consumption is one of the least cyclical. Government can temper booms and busts through the use of monetary and fiscal policy. Monetary policy refers to changes in overnight interest rates by the Federal Reserve. When the Fed wishes to stimulate economic activity, it reduces interest rates; to curb economic activity, it raises rates. Fiscal policy refers to changes in the federal budget deficit. An increasing deficit stimulates economic activity, whereas a decreasing deficit curbs it. By their nature, policy changes to influence the business cycle affect the economy only temporarily because booms and busts are transient. In recent decades, expansions have become longer and recessions shallower, perhaps because of improved stabilization policy, or perhaps because of good luck.
Long-term growth receives less attention from policymakers than cyclical growth. Yet in a broader view of history, long-term growth is the more important of the two because it is the key to raising living standards. Long-term growth is caused by increases in labor, capital, and productivity. Policy changes in the areas of education, taxation, competition, basic research, and infrastructure can influence the economy's long-term growth rate, but only at the margins. Long-term growth has altered very little over most of U.S. history despite a broad array of policy changes. That fact is less surprising when one considers that the main contributor to long-term growth is technological progress, over which the government has little direct influence. In recent years, long-term growth has accelerated modestly because of higher productivity growth, driven mainly by what is popularly referred to as the "information technology (IT) revolution." Although the government had little direct influence over the IT revolution, it provided an environment in which those technological changes were allowed to thrive, which likely explains why many other economies did not experience a similar productivity acceleration.
This report will be updated as events warrant.