The Business Cycle and its Consequences Chapter 14

I. Phases of the Business Cycle A.________________ – two consecutive quarters of GDP decline B.Trough – the point where GDP stops decreasing C.________________ – period of recovery from a recession D.Peak – the point where GDP stops increasing

II. The Great Depression Depression – long recession with high unemployment A.Causes 1.________________________________ 2.Bank Failures – easy lending practices 3.Overproduction 4.Natural disaster (_____________) 5.Restricted international trade (tariffs) 6.Foreign investment – ___________________________ B.Business Cycles since WWII 1.Average recession – 11 months 2.Average expansion – 43 months

III. Causes of recessions A.Capital expenditures – businesses slow down investing B.Innovation and imitation – _______________________________________ _______________________________________ C.Monetary factors – _______________________________________ _______________________________________ D.External shocks – events that have effects on the economy (wars, natural disasters, etc.)

IV. Predicting the Business Cycle A.Econometric model – mathematical formula used to describe the behavior of the economy B._____________________________– combination of statistical phenomena that generally happen before a recession

V. Unemployment A.The Unemployment Rate 1.The unemployed ________________________________________________ Worked less than 1 hour for pay in the past week 2.Limitations Does not include ___________________________________ B.Types of Unemployment 1.______________– results from people who leave one job for another 2.Structural – result of skills being out of demand 3.______________ – result of recession 4.Seasonal – work only done during certain times of the year 5._______________ – workers replaced by machines

VI. Inflation Definition – ___________________________________________ A.Measuring Inflation 1.Price of market basket of goods is determined for base year (Consumer Price Index) 2.Price of market basket is compared over time and reported in percentage of change B.Degrees 1.Creeping – 1-3% 2.Galloping – % 3.Hyperinflation – 500% or more C.Causes 1._____________________– prices are pushed up by increased business costs 2._____________________– prices are pulled up by increased demand 3.Excessive monetary growth – too much money chasing too few goods D.Effects 1.Less purchasing power 2.Changing spending habits – ____________________________ 3.Speculation – people try to take advantage of rising prices 4.Distribution of income – _______________________________