THE BUSINESS CYCLE UNIT 23

FOOD FOR THOUGHT... Which factors show how well an economy is doing? How well is the global economy doing at the moment? How well is the economy doing in your country? When was the last significant change to the economy, and what was the most probable cause? When do you expect the economic situation to change, and why? What are the main causes of the alternate periods of growth and contraction of the business cycle? Can or should governments influence the business cycle?

WHAT IS THE BUSINESS CYCLE?

VOCABULARY – THE BUSINESS CYCLE – MK, p. 114 I Before reading about the business cycle, match up the words and definitions in Vocabulary 1, p, 114. II Then, complete the definition of the BUSINESS CYCLE – a cycle in which business activity increases, d___________, then increases again; a cycle showing fluctuations of a country's G____________ as booms and r____________ succeed each other.

READING – WHAT CAUSES THE BUSINESS CYCLE? – MK, pp. 114 & 115 I READ THE TEXT AND ANSWER THE QUESTIONS: What is the business cycle? What is GDP? What happens during a boom? (What tends to rise?) What happens during a recession? (What falls?) What is a depression? (synonym?) What is a peak? What is a trough? What is a downturn? (synonym?) What is an upturn? (synonym?)

WHAT IS DEFINED? ______ is the total value of final goods and services produced in a year by a country's nationals (including profits from capital held abroad). ______is the total value of final goods and services produced within a country's borders in a year.

II THEORIES OF THE BUSINESS CYCLE – Finish the sentences. A INTERNAL A downturn begins when... People tend to spend more and borrow money when… People tend to spend less and save when… When interest rates rise... Companies only invest while… B EXTERNAL Causes outside economic activity are factors such as... The economist Schumpeter believed that… Creative destruction means that…

WHICH PARTS OF THE BUSINESS CYCLE ARE ILLUSTRATED BY THESE CARTOONS?

GDP per capita, 2016, source: IMF

GDP per capita nominal, 2016, source: IMF estimates

FOOD FOR THOUGHT... What examples can you give of ‘creative destruction’ occurring at the moment? During a downturn, to what extent should the government intervene in the economy, by creating demand or jobs? How could it do these things? What are the economic arguments against such governmental spending?

VOCABULARY – MONETARY AND FISCAL POLICY – MK, pp. 116 & 117 Before listening and reading about the government and the economy, do the VOCABULARY TASKS 1 & 2, p. 116. LISTENING 2: KEYNESIANISM - Listen to Michael Kitson talking about Keynesianism and fill in the gaps.

READING – KEYNESIANISM AND MONETARISM – MK, pp. 117 & 118 I Read the text in MK, pp. 117 & 118 and match the paragpraphs with the corresponding headings. II After reading the text, match the half sentences to summarise the main ideas from the text.

KEYNESIANISM AND MONETARISM – DISCUSSION Which of the arguments in the text do you find the most convincing? Which is more important, fighting inflation or unemployment? In an economic crisis, should governments rescue banks that have taken too big risks, and large companies in big industries, or rather invest in new, efficient start-up companies in innovative new industries such as IT, nanotechnology, biotechnology, wind and solar power, etc.? Which companies in your country are ‘too big to go bankrupt’? Which industries should the government invest in?

THE BUSINESS CYCLE RECAPPING A business cycle occurs due to the f____________ that an economy experiences over time resulting from changes in economic g ____________. Understanding business cycles is the essence of m ____________. Economists try to work out where the economy is located and more importantly where it is h____________ in order to deal with possibly undesirable future economic events. When the economy is at or is heading in an undesirable direction, economists may apply f____________ or m____________ policy tools to change the course of the economy. In general, a business cycle describes changes in the demand-side of the economy as measured by GDP, where: GDP = C + I + G + NX consumption + investment + government spending + net exports (exports – imports) Over time, GDP does not remain constant and will change for many reasons, economic and non-economic. Economic reasons include changes in government policies such as t ____________ and i ____________ rates. The non-economic reasons are too many to even consider listing, but include factors such as w ____________, d ____________, natural and man-made d ____________.

THE BUSINESS CYCLE RECAPPING The prolonged periods of economic growth are eventually accompanied by rising i____________ rates (or the threat of higher inflation). The defining part of the business cycle is a r ____________. Without a recession, the economy doesn't really experience a business cycle, just a period of a prolonged economic e ____________. Between 1992 and 2000, the U.S. economy did not see a recession and set the r____________ for the longest period of economic expansion without a recession. There were changes in real GDP g ____________ during this time period, GDP even d ____________ in the first quarter of 2003, but no recession. Prior to 1945, periods of recession were almost as common as days when the economy was growing. Until the Great D____________ of the 1930s, economic policy makers generally did little to counteract the forces that drove the business cycle, choosing instead to allow the economy to take its own c ____________. The result was long (typically almost 2 years) and f ____________ recessions that were usually much more severe than modern-day recessions. Modern economic thought is characterized by the use of both fiscal and monetary p ____________ to counteract and smooth out the business c ____________. Economists have had success in using these policies to make the dealings of U.S. firms, as well as the life of Americans who work and save in f ____________ markets less turbulent.