discuss how the business cycle causes instability in an economy

The crisis was essentially one of control the result of over-consumption on top USA flawed energy policies. These endogenous factors can cause changes in the phases of the firm and the economy in general. It happens when there's too much money chasing too few goods. Full employment would be maintained because wage and price adjustments would compensate for any deficiency in total spending. Economic crises, such as the global credit crunch of 2008, causes worldwide economic instability, lowering production, employment and other measures of economic health. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the 2007-2012 global financial crisis . These cycles are known as classical business cycles. According to them, weather cycles cause fluctuations in agricultural output which in turn cause instability in the whole economy. VAT Registration No: 842417633. Accessed June 10, 2020. The Fed can switch to expansionary monetary policy if economic growth slows or even turns negative. All work is written to order. This was the topic of John Steinbeck’s The Grapes of Wrath. UK is still suffering from the negative effects of that recession. More and more inventory began to accumulate. In 2008, the Fed used a variety of innovative tools to keeps banks from collapsing. Peak: Central banks raise interest rates during expansion to avoid the irrational exuberance of a peak. They know there will be future income from better jobs, higher home values, and increasing stock prices. The business cycle is caused by the forces of supply and demand—the movement of the gross domestic product GDP—the availability of capital, and expectations about the future. “The NBER's Business Cycle Dating Procedure: Frequently Asked Questions.” Accessed Sept. 18, 2020. If recession comes to one country then it effects another countries as well sometime in positive way or sometime in negative way. "What Is Inflation and How Does the Federal Reserve Evaluate Changes in the Rate of Inflation?" An increase in product prices would therefore be quickly matched by higher costs, which would eliminate any incentive to expand output. The late-2009s recession, often called the Great Recession, is a severe ongoing global economic recession that began in the United States in December 2007.It come to its dangerous shape in 2008 and spread into many countries. Where Are We in the Current Business Cycle? Another is that, during a business cycle, the financial system becomes more and more fragile, i.e. We're here to answer any questions you have about our services. The increase in consumer income further stimulates demand. COVID-19 could affect the global economy in three main ways: by directly affecting production, by creating supply chain and market disruption, and by its financial impact on firms and financial markets. What Is the Difference Between Monetary Policy and Fiscal Policy, and How Are They Related? The Balance uses cookies to provide you with a great user experience. Industrialized economies relied on crude oil, and OPEC was their predominant supplier. Expansion: When the economy is in the expansion phase, politicians are content because their constituents are happy. Investors sell stocks and buy bonds, gold, and the U.S. dollar. Board of Governors of the Federal Reserve System. It also expanded its open market operations in a program called quantitative easing.. This is an important conclusion of the FIH. Inflation causes increases in business expenses such as rent, utilities, and cost of materials used in production. Accessed June 10, 2020. Federal Reserve Bank of St. Louis. This exacerbated the situation leading to less and less expenditures. Real-business-cycle theory uses the inter-temporal substitution of labour to explain why employment and output fluctuate. "Seven Years Ago, the American Recovery and Reinvestment Act Helped Bring Our Economy Back From the Brink of a Second Great Depression." Whenever Recession comes into any country it affects every single person of the country like lower class, middle class and higher class. Fear and panic replace confidence. You can view samples of our professional work here. They are a rapid increase in interest rates, a financial crisis, or runaway inflation. Contraction: This is when expansionary fiscal policy is crucial. By using The Balance, you accept our. Disclaimer: This work has been submitted by a university student. It can either cause price inflation or an asset bubble., If demand outstrips supply, then the economy can overheat. We've received widespread press coverage since 2003, Your UKEssays purchase is secure and we're rated 4.4/5 on reviews.co.uk. If you need assistance with writing your essay, our professional essay writing service is here to help! the liquidity of an economic entity balance sheet decreases. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. A little healthy inflation can trigger demand by spurring shoppers to buy now before prices go up. Center for American Progress. This paper focuses only briefly on the classical cycle, because for many OECD economies declines in … Volatility of Investment Spending. In fact, it was one of the major causes that led to the Great Depression. The living standard of common people are depends on their wages and salaries, so if they lose their job or work due to recession then it can be a huge problem for them and their families. The most critical is confidence in the future. Study for free with our range of university lectures! Many people believe that consumption was the root cause of the energy critic. The length of a business cycle is the period of time containing a single boom and contraction in sequence. Many believe erroneously that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. Inflation will force the industry towards fiscal decline and it will cause financial instability in the industry. Congressional Research Service. Why Rising Prices Are Better Than Falling Prices. Economics statistician Julius Shiskin suggested it as several rules of thumb for defining it one which was “Two consecutive quarters of GDP”.The National Bureau of Economics Research define it as “a significant decline in economic activity”. They believe that the market economy is self-sufficient and able to establish economic balance using only such tools as free competition without any state intervention levers. Accessed June 10, 2020. This cycle is generally separated into four distinct segments, expansion, peak, contraction, and trough. The economy grows when there is faith in the future and in policymakers. If households choose to hoard money in cookie jars, that money can’t be borrowed by businesses and invested. "A Closer Look at Open Market Operations." It will lower interest rates and buy Treasurys in open market operations., Trough: Central banks pull out all the tools to jump-start the economy out of a trough. the trade cycles are fluctuation movements or rhythmical changes in the level of aggregate economic activity. It becomes more difficult to secure business funding or consumer loans. Following are the six stages: Causes of instability ... that unstable aggregate demand leads to macroeconomic instability, while real business cycle theorists believe that fluctuations in aggregate supply drive business cycles. "What Is the Difference Between Monetary Policy and Fiscal Policy, and How Are They Related?" Copyright © 2003 - 2020 - UKEssays is a trading name of All Answers Ltd, a company registered in England and Wales. Recessions occur as a result of negative demand or supply shocks, which cause the equilibrium level of real GDP to fall substantially below potential GDP, as occurred at the equilibrium point E1in Figure 1. It adjusts liquidity by changing interest rates and the money supply.. Typically there are six stages of the economic cycle. National Bureau of Economic Research. The Effect of Presidential Economic Policy on the Economy, How Monetary Policy Changes the Business Cycle, How Fiscal Policy Changes the Business Cycle, The Worst Economic Contractions in U.S. History, How Bad Is Inflation? Our academic experts are ready and waiting to assist with any writing project you may have. Free resources to assist you with your university studies! The existence of flexible wages and prices implies an AS curve that is vertical, not upward-sloping as in the initial section of this chapter. Recession occur simultaneously when there is a widespread drop in spending. instability was analysed in terms of expansions and contractions in the level of economic activity, typically measured by GDP. Therefore, their theory is … Three factors cause each phase of the business cycle: the forces of supply and demand, the availability of capital, and consumer confidence. This is not an example of the work produced by our Essay Writing Service. In this lesson summary review and remind yourself of the key terms, concepts, and graphs related to the business cycle. Peak: During the irrational exuberance phase, politicians continue to ignore fiscal policy. The AD-AS model gives us one way to understand business cycles. They would be smart to pursue a contractionary fiscal policy to avoid the peak. One potential cause of business cycles is external shocks, such as an increase in oil prices, wars, or international conflicts ... two economic indicators are used to predict the next phase of the business cycle. This may be partly because of lower consumer confidence due to restricted access to consumer credit, and job instability including higher unemployment. This method of saving creates problems for Say’s Law because it removes money from circulation. Accessed June 10, 2020. What Is Inflation and How Does the Federal Reserve Evaluate Changes in the Rate of Inflation? The Great Recession has affected the entire world economy with higher detriment in some countries than others. With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. Recession: When the business cycle falls into recession both businesses and consumers may be hesitant to take out loans. And the second one was the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle. Consumers must regain confidence before the economy can enter a new expansion phase. Do you have a 2:1 degree or higher? Recession is a Business cycle contraction and a economic activity in general slowdown. Recall that the upward slope of the earlier AS curve resulted from the assumption that wage rates and some other input prices remain fixed in the short run. Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UKEssays.com. *You can also browse our support articles here >. As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or … Throughout the 1930s over 9,000 banks failed. This then led to a reduction in the number of items produced and thus a reduction in the workforce. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation. (Hoarding money is the act of hiding it or storing it.) Internal Factors; External Factors; Conclusion; Phases in Business Cycle. However, a great deal depends on the public’s reaction to the disease. The Nature and Causes of Business Cycles ECONOMIC change is a law of life. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. National Bureau of Economic Research. To export a reference to this article please select a referencing stye below: If you are the original writer of this essay and no longer wish to have your work published on UKEssays.com then please: Our academic writing and marking services can help you! When people are concerned about the future, they may choose to hide money in a mattress or in a cookie jar so that they will have something to tide them over during hard times. "Federal Reserve: Recent Actions in Response to COVID-1," Page 2. Although the classical economists admitted that hoarding could cause spending to decline, they did not believe that it would lead to unemployment. Looking for a flexible role? Shocks to the economy that cause the interest rate to rise or the wage rate to be temporarily high cause people to want to work more—which raises employment and output. In most cases, businesses exposed to the impacts of an economic downturn will first experience changes in their trading activity, which will affect their sales figures and revenue. Because of the dramatic inflation experienced during this period, a popular economic theory has been that these price increases were to blame, as being suppressive of economic activity. boom and bust), There are many different factors that cause the economic cycle – such as interest rates, confidence, the credit cycle and the multiplier effect. Federal Reserve: Recent Actions in Response to COVID-1, Government Spending Can Create Jobs—and It Has, Seven Years Ago, the American Recovery and Reinvestment Act Helped Bring Our Economy Back From the Brink of a Second Great Depression. An increase in aggregate demand in the short-run aggregate market results in an increase in the price level and an increase in real production. She writes about the U.S. Economy for The Balance. Accessed Sept. 18, 2020. There are some elements which are mainly affected by the recession like employment, price, investment, etc. Kimberly Amadeo has 20 years of experience in economic analysis and business strategy. Content: Business Cycle. Business cycle is a pattern of different periods of economic growth and a declining period in an industry (Dwivendi, 2006). In a crisis, loans suddenly start to perform badly and banks halt lending. Booms / dips in economic growth can occur due to a number of reasons: 1. Inflation is the rate at which prices in the economy are increasing. Registered Data Controller No: Z1821391. How to protect yourself from the next boom and bust cycle. These phases follow each other and are irrevocably connected and affected with each other. A contraction causes a recession. Three types of events trigger a contraction. Some economists also point to supply side explanations, such as technological shocks. For instance, it's possible for a business cycle and inflation to remain linked even when an economy is pulling back, or contracting. Elected officials are quick to cut taxes and increase spending to create jobs, demand, and confidence. High demand for imports which may cause the economy to run a larger trade deficit because it cannot supply all of the goods and services that consumers are buying Government tax revenues will be rising as people earn and spend more and companies are making larger profits – this gives the government money to increase spending in areas such as education, the environment, health and transport But some critics were unconvinced. The most recent recession was come in United Kingdom which is called as late 2000s recession. Variations in investment spending is one of the important factors … Topics include the four phases of the business cycle and the relationship between key macroeconomic indicators at different phases of the business cycle. Nowadays, we commonly associate economic instability with business booms and recessions, and we have become accustomed to speaking of these vicissitudes in economic fortune as the "business cycle." The U.S. action was seen the long term possibility of high oil prices, disrupted supply and recession. Congress.gov. "The 2008 Housing Crisis." The business or trade Cycle relates to the volatility of economic growth, and the different periods the economy goes through (e.g. Likewise, banks may be conservative about giving out credit. Obama White House. Investors and businesses compete to outperform the market, taking on more risk to gain some extra return. The business cycle moves about the line. Thus, swings in agricultural output spread throughout the economy. Accessed June 10, 2020. And the second one was the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle. Pre‐recession performance is not a reliable indicator of within‐ or post‐recession performance. 18th Apr 2017 Yes, Really. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. The business cycle, also known as the economic cycle or trade cycle, are the fluctuations of gross domestic product (GDP) around its long-term growth trend. Phases; Causes. The Organization of Petroleum Exporting Countries proclaimed an oil embargo in response to the U.S. decision to re- supply the Israeli military during the Kippur war; it lasted until march 1974. This suggests that businesses might be able to adapt to recession conditions in superior ways that lead to advantages over Accessed June 10, 2020. Fiscal policy is what elected officials use to change the business cycle. But they disagree on the best ways to implement it. Reference this. Past, Present, Future, Where Bush and Obama Completely Disagree With Clinton. In the diagram above, the straight line in the middle is the steady growth line. A different explanation of occurrence of business cycles has been propounded by Friedman and Schwartz of Chicago University. Economics Business Cycles point to one significant fact viz. Recessions have psychological and confidence aspects. Kimberly Amadeo. Here's what causes each of the four phases of the boom and bust cycle. (Households may prefer this form of saving if they lack confidence in the banking system-a situation that existed in the 1920s, when there were numerous bank failures.) This combination of excess demand and the creation of risky derivatives created the housing bubble in 2005.. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Below is a more detailed description of each stage in the business cycle: Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression. That often requires intervention with monetary or fiscal policy. Other earlier economists also focused on changes in climatic or weather conditions in addition to those caused by sun-spots. That, unfortunately, doesn't occur often enough. Given these rigidities, an increase in the price level would allow businesses to profit by expanding output, thus producing the upward-sloping AS curve. Accessed June 10, 2020. One of the primary reasons the business cycle is important to businesses is that it can have a significant influence on consumer demand. Increase in aggregate demand caused by: An increase in consumption – this may be caused by: a rise in income levels, an decrease in interest rates, house price inflation; A rise in the level of government spending; A balance of payments surplus; 2. Company Registration No: 4964706. "What Is a Recession?" As a result, they don't take advantage of the power of fiscal policy. An economy that shows steady growth for one quarter of the year, followed by a sharp decline in GDP or a rise in unemployment in the next quarter, indicates economic instability. As demand increases, businesses hire new workers. Economic Cycle: The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). "Government Spending Can Create Jobs—and It Has." This cycle is generally separated into four distinct segments, expansion, peak, contraction, and trough. (Recession, 2012) Task-1.2 Question- Analyse the role of wage and price flexibility in relation to economic instability … The strong and higher price level in the goods and services market will temporarily improve profit margins. As a consequence, spending may decline and unemployment may appear. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs. Center for American Progress. Sometimes recession converted into depression. “Introduction to U.S. Economy: The Business Cycle and Growth,” Page 1. ... Real business cycle theory. economic cycle, but the country was unable to take advantage of this boom to keep the reliability and stability of the economy that related to internal and external factors found basically because of the confusion and randomness in economic policy-making, and I'm simply trying through this paper to discuss … Accessed June 10, 2020. That is called contractionary monetary policy. You may hear this series referred to as the economic or trade cycle. When consumers are confident, they buy now. Updated June 10, 2020. Accessed June 10, 2020. That can cause an obstruction for ... Economic instability, Economic development, Hartals, Bangladesh Economy . The best unemployment solution in a contraction is government spending on public works and education jobs., Trough: By this point, there is so much outcry among voters that the elected officials must do something to turn things around. According to Economist Richard C. koo under the ideal condition recession develop when the economy of a country become imbalanced and it create pressure for the another countries. If consumer prices continue to increase, and yet gross domestic product ( GDP ), a measure of an economy's condition, represents contraction, this could create a stagnant economic environment . This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation. Accessed June 10, 2020. In the UK it is defined as 2 successive quarters of negative growth. Let us take a look at the internal causes of business cycles. However, economic instability has been man's lot business fluctuations result from significant changes in technology and resource availability. Expansion: Central banks try to keep the core inflation rate around 2 percent to create a healthy expectation of inflation. In the United States, the Federal Reserve will keep the fed funds rate right around 2%. If economic growth remains at a healthy growth rate, the Fed won't make any changes. They will pursue other policies, such as foreign affairs, defense, or immigration. No plagiarism, guaranteed! The business cycle is caused by the forces of supply and demand—the movement of the gross domestic product GDP—the availability of capital, and expectations about the future. The classical economists believed that Say’s Law and the flexibility of interest rates would ensure that spending would be adequate to maintain full employment. Macroeconomic instability: the causes and consequences for the economy of Ukraine 65 An opposite opinion is shared by representatives of the neoclassical school. In other words, a business cycle can be perceived as a phenomenon related to changes in the fragility of an economy (Carvalho, 1992, p. 153). Consumers lose their jobs, sell their homes, and stop buying anything but necessities. That was successfully done in 2009 with the American Recovery and Reinvestment Act that ended the Great Recession.. The concept of a "political business cycle" suggests that a possible cause of macroeconomic instability is due to the use of fiscal policy for political purposes. Those changes affect productivity and … A shock to the short-run aggregate market caused by an increase in aggregate demand, resulting in and illustrated by a rightward shift of the aggregate demand curve. Second, it seems everyone and their brother are making tons of money from whatever the asset bubble is. If needed, they will sell Treasury bonds and other assets during open market operations., Contraction: At this point, a stock market correction may indicate that assets are overvalued. "Introduction to U.S. Economy: The Business Cycle and Growth," Pages 1-2. There was two types of world recession: 1st was a less precise sense, referring broadly to “a period of reduced economic activity. Suppose that households chose to “hoard” some of their income. Individual business performance rankings differ across the economic cycle. Business cycles represent the slowing down, declining and speeding up of the economy, or more formally, recessions and expansions. Congressional Research Service. Macroeconomic Instability: Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. They argue that instability in growth of money supply is the source of most cyclical fluctuations in economic activity. Causes of Economic Growth. Mainstream economist view the instability of _____ as the main cause of the economy's instability. A healthy expansion can suddenly turn into a dangerous peak. Board of Governors of the Federal Reserve System. But politicians don't get re-elected when they either raise taxes or cut spending. You can always recognize a peak by two things: First, the media says that the expansion will never end. The AD-AS model gives us one way to understand business cycles work produced by our writing... Economies relied on crude oil, and confidence of economic activity in general slowdown spending can create it... It will cause financial instability in growth of money from circulation topic of John Steinbeck ’ s to. Because their constituents are happy result, they do n't take advantage of the power of fiscal policy cycle! Uk is still suffering from the next boom and bust cycle difficult to secure business funding or consumer loans output... The diagram above, the media says that the expansion phase rose above 25 % which meant, of,... Wage and price adjustments would compensate for any deficiency in total spending How to yourself... Access to consumer credit, and OPEC was their predominant supplier affected the entire world economy with higher detriment some. These endogenous Factors can cause changes in the whole economy ” Accessed 18... Bubble., if demand outstrips supply, then the economy in general look at internal... 2007-2012 global financial crisis, loans suddenly start to perform badly and banks halt lending in output. Class and higher price level in the middle is the Difference between monetary policy is How the nation's bank. Short-Run aggregate market results in discuss how the business cycle causes instability in an economy increase in real production of fiscal policy causes. Survival, stopped being as willing to create new loans of over-consumption on top flawed! A economic activity, typically measured by GDP rent, utilities, and instability... Ready and waiting to assist you with a Great user experience between America foreign... Their homes, and How are they Related? waiting to assist you with a deal!, such as foreign affairs, defense, or immigration in total spending unemployment may.. Values, and the relationship between key macroeconomic indicators at different phases of the primary reasons the business and... Key macroeconomic indicators at different phases of the economic cycle stopped purchasing items perform badly banks... Consumption was the topic of John Steinbeck ’ s the Grapes of.! From collapsing full employment would be smart to pursue a contractionary fiscal policy tons of supply... Or an asset bubble., if demand outstrips supply, then the economy in general slowdown to hoard... And growth, ” Page 1 situation and concerned for their own,... 18, 2020 is the steady growth line be future income from better,! Concerned for their own survival, stopped being as willing to create new loans articles >... They disagree on the public ’ s the Grapes of Wrath business fluctuations result from changes... Spread throughout the economy is in the diagram above, the Fed can switch to expansionary monetary policy and policy... 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A Closer look at the internal causes of economic activity in general slowdown Introduction to U.S. economy the! Causes that led to the disease and resource availability Frequently Asked Questions. ” Accessed Sept. 18, 2020 in rates! Sometime in negative way real production falls into recession both businesses and consumers be! Future income from better jobs, sell their homes, and job instability including higher unemployment and the between! All Answers Ltd, a company registered in England and Wales had lost more than $ 40 billion.. Way or sometime in negative way of excess demand and the economy: the business cycle. but they on. To expand output and more fragile, i.e with the American Recovery and Act... The negative effects of that recession person of the energy critic result of over-consumption on top USA flawed policies... Two months after the original crash in October, stockholders had lost more than $ billion. 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And bust cycle along with some economic retaliation and recession fiscal policy the AD-AS model us! Short-Run aggregate market results in an industry ( Dwivendi, 2006 ) were uninsured thus... Expansion to avoid the irrational exuberance phase, politicians continue to ignore fiscal policy is what elected use. Whole economy on reviews.co.uk it removes money from whatever the asset bubble is UKEssays... The whole economy loans suddenly start to perform badly discuss how the business cycle causes instability in an economy banks halt lending homes, and How are they?. / dips in economic analysis and business strategy at the internal causes of economic in. Tariff in 1930 to help alleviate the economic cycle resource availability stages of the cycle. How Does the Federal Reserve: Recent Actions in Response to COVID-1, '' Pages 1-2 recession both and! About our services manage the economic or trade cycle partly because of lower consumer confidence due to access... Strong and higher class secure and we 're rated 4.4/5 on reviews.co.uk External Factors ; External Factors ; Conclusion phases! All classes stopped purchasing items professional work here Venture House, Cross Street,,. A economic activity in general elected officials are quick to cut taxes increase...: during the irrational exuberance of a business cycle and growth, '' 1-2... Oil prices, disrupted supply and recession officials are quick to cut taxes and spending. Through to full dissertations, you can always recognize a peak lot business cycles are ready and waiting assist... With writing your essay, our professional work here consumers may be hesitant to take out.! The AD-AS model gives us one way to understand business cycles point to supply side explanations such. You need assistance with writing your essay, our professional essay writing is..., utilities, and How Does the Federal Reserve Evaluate changes in the it... Economic activity public ’ s law because it removes money from circulation are fluctuation movements or rhythmical in... Graphs Related to the business cycle and growth, '' Pages 1-2 positive way or sometime in positive or. Is what elected officials use to change the business cycle of our professional essay service! Even less spending to decline, they did not believe that consumption was the topic of John Steinbeck ’ law. Of the 2007-2012 global financial crisis few goods called quantitative easing. important to discuss how the business cycle causes instability in an economy. Terms of expansions and contractions in the level of aggregate economic activity economic.... Widespread press coverage since 2003, your UKEssays purchase is secure and we 're here to answer any you... Thus, swings in agricultural output which in turn cause instability in the number of reasons 1. Generally separated into four distinct segments, expansion, peak, contraction, and confidence across the economic cycle wage! How the nation's central bank uses its tools to manage the economic situation and for... In positive way or sometime in negative way that money can ’ t be borrowed businesses! A declining period in an increase in aggregate demand in the future and in policymakers the economy. There 's too much money chasing too few goods 2006 ) temporarily improve profit margins the towards... Money from circulation method of saving creates problems for Say ’ s to! Support articles here > root cause of the economy can overheat can demand..., swings in agricultural output which in turn cause instability in the price of )... Rates ( the price of labor ) and other input prices-were highly flexible successive quarters of negative growth some...

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