THE BUSINESS CYCLE

To recur – to happen all over again To fluctuate – to vary, to change The Business Cycle the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time (www.investopedia.com) To recur – to happen all over again To fluctuate – to vary, to change Output - production

What happens in a BOOM? Businesses produce more goods Businesses invest more in machinery Consumers spend more money Less money is spent by the Government on unemployment benefits More money is collected by the government in income tax and VAT Prices tend to increase due to extra demand Level of investment increases As a result the level of employment, incomes and trade rise There is overall prosperity

What causes RECESSION? Decrease in spending by consumers due to lack of faith in the economy.  Less consumption would mean decline in demand for products. Which leads manufacturers to cut down on production. Lower production would lead to job cuts. Which leads to high levels of unemployment. Which perpetuates the cycle due to limited spending.

WHAT HAPPENS IN RECESSION? WHAT HAPPENS IN A BOOM? WHAT HAPPENS IN RECESSION? Businesses produce more goods Businesses invest more in machinery Consumers spend more money Less money is spent by the Government on unemployment benefits More money is collected by the government in income tax and VAT Prices tend to increase due to extra demand Business cut back on production Some businesses may go bankrupt Consumers spend less money Individuals may lose their jobs More money is spent by the Govt on unemployment benefits Less money is collected by the Govt in income tax and VAT Prices start to fall

contraction /kən’trækʃən/, downturn expansion, upturn bottom top LEAD-IN p. 114 VOCABULARY 1 p.114 MATCH. growth peak recession trough /trɔf/ RECESSION → A DOWNTURN THAT LASTS MORE THAN SIX MONTHS DEPRESSION OR SLUMP → A DOWNTURN THAT LASTS FOR A YEAR OR TWO contraction /kən’trækʃən/, downturn expansion, upturn bottom top

Watch and fill in the missing words. http://www.youtube.com/watch?v=EMHkiKxtlvw

ECONOMIC TRENDS IN RECESSION EXPANSION Economic activity slows down Consumers spend less money Businesses make fewer sales Inventories build up Companies earn less revenue Fewer orders are placed Businesses cut back on output Unemployment rate goes up Businesses reduce the number of people on payrolls Finally it reaches a trough Economic activity picks up again Sales improve Excess inventories are used up New orders are placed Production is ramped up again Job opportunities improve Unemployment rate comes down Finally it tops out

Translate parts of the sentences using new collocations: Economic activities se usporavaju. Višak zaliha je used up. Fewer se naručuje. Firme smanjuju on output. Stopa nezaposlenosti goes up. Businesses reduce broj ljudi na platnom spisku. Production se opet potiče. Finally it dosegne najnižu točku ekonomskog ciklusa.

V, U or W - shaped RECESSION????

U – SHAPED RECESSION Slowdown lingers and the recovery is delayed V –SHAPED RECESSION Bottoms out and rebounds quickly

INTERNAL (ENDOGENOUS) THEORY GOOD PERIOD ( BOOM) People spend People run up debts DOWNTURN (RECESSION) Debts have to be paid Demand decreases Interest rates rise which means more to pay on mortgage or rent People fearing the possibility of losing their jobs start saving money and consume less and consequently there is a fall of demand and fall in production and employment

EXTERNAL (EXOGENUOUS) THEORIES Causes are outside economic activity scientific advances natural disasters elections or political schocks demographic changes technological inventions (steam engines, railways, automobiles, electricity, microchips) which lead to periods of “creative destruction”

TRUE OR FALSE Reading MK. p. 114-115 During a downturn, parts of the economy expand to the point where they are working at full capacity. A long period of contraction is called a boom. A downturn that lasts more than six months is called a slump. People tend to spend less when the economic times are good and when they feel confident about the future. When interest rates rise people find themselves paying more than they anticipated on their mortgage and rent. Companies only invest when demand is falling. If demand exceeds supply, prices should fall and encourage people to start spending more. Creative destruction means that radical innovations may destroy established companies or industries.

Key: An upturn Expansion A recession Spend more True Demand is growing Supply exceeds demand true

Match up the words with similar meaning: Boom Decrease Depression Excess Expand Expenditure Output recovery Slump Spending Grow Stimulate Upturn Production Surplus reduce

KEY Boost - stimulate Decrease – reduce Depression – slump Excess – surplus Expand – grow Expenditure – spending Output – production Recovery - upturn

Match up the words with opposite meaning: Boom Contract Demand Endogenous Peak save Trough Expand Spend Depression Supply exogenuous

KEY Boom – depression Contract – expand Demand – supply Endogenuous – exogenuous Peak – trough Save - spend

GOVERNMENT AND THE BUSINESS CYCLE In order to prevent the economy from running too hot (inflation) or too cold (recession, depression), the government often becomes involved in efforts to try and stabilize the economy. The government has two major tools to try and stabilize the economy and achieve its goals: Fiscal policy and monetary policy.

MONETARY POLICY There is a relationship between the amount of money in the economy (the money supply) and the level of business activity. If the money supply increases, consumers spending will increase, promoting growth. If the money supply decreases, the economy is likely to contract.

MONETARY POLICY The government, through the Central bank, can regulate the money supply to attemt to promote or inhibit economic activity. What the central bank does most often is raise (to slow down) or lower (to speed the economy up) interest rates.

FISCAL POLICY Fiscal policy is the taxing and spending decisions that are made by the government. Fiscal policy actions of the government fall into two general categories: Raise or lower taxes Increase or decrease government spending

John Maynard Keynes (1883-1946) The most influential economist of the mid-20th century A school of economic thought named after him→ Keynesian or Keynesianism His ideas about government intervention in the economy, and the use of fiscal and monetary measures to diminish the effects of economic recessions and periods of high unemployment, were put into practice by many major Western economies shortly before the end of the Great Depression in the 1930s Keynes argued against the traditional view that the free markets would automatically provide full employment as long as workers reduced their wage demands Keynesian economic policies were widely adopted in the 1950s and 60s

In 1971 the Republican US President Richard Nixon famously said: “We are all Keynesians now” but by the end of the 1970s, the monetarist argument that Keynesian policies ineviably lead to inflation had become dominant Keynesianism made a dramatic return in the crisis of 2008