The Business Cycle

The Business Cycle Business Cycle represents the tendency of the economy to go from good to bad and back again Common in free-market economies Expansion- the economy is booming and GDP increases Inflation (rise in the costs of goods and services) often accompanies expansion Prices inflate as customers compete to buy scarce products

The Business Cycle Increased competition forces businesses to pay higher prices for raw materials and transportation May also have to increase wages for workers or continuously hire more people Inflation and expansion raise the costs of production Businesses will then have to increase the prices of their products to make a profit At some point, expansion and inflation stop- the business cycle has reached a peak

The Business Cycle After the economy peaks, economic activity begins to slow Economic slowdowns are called contractions If the contraction lasts long enough and is severe enough, a recession occurs During a recession, businesses fail, more people are unemployed, and profits fall

The Business Cycle When the economy reaches its lowest point, it is in a trough If the trough if particularly low, the economy is in a depression During a depression, unemployment is very high People don’t have as much money to buy goods/services, so businesses suffer or close The economy will bounce back and begin to grow again after hitting a trough The business cycle continues

The Great Depression The worst economic depression in our nation’s history Occurred in October, 1929 Stock prices greatly fell, many banks closed, thousands of people lost their savings

The Great Depression 1932- businesses were producing half as much as they were in 1929 Thousands more businesses were closed Crop prices were lower than ever Farmers couldn’t make any money 1933- one in four Americans were unemployed Unable to pay their mortgages, many Americans lost their homes The combination of FDR’s New Deal legislation and war-time spending during WWII would ultimately pull us out of the Depression

Old Theories of the Business Cycle Before the Great Depression, most economists thought the business cycle should be left alone Unwise for the government to try to control inflation, boost production, or end unemployment These economists thought the problems that came with the business cycle would resolve themselves and that recessions would not last long The Great Depression proved all of this was wrong (it lasted over 10 years) and that government intervention in the economy was necessary

Government Efforts FDR’s New Deal program saw the government hire unemployed workers to do work such as create parks, build schools, and improve the infrastructure of our country The Civilian Conservation Corps worked on projects to restore forests, build national parks, and protect natural resources The Federal Deposit Insurance Corporation (FDIC) was set up to insure bank deposits Ensures the money you deposit in the bank will be kept safe

Government Efforts Dishonesty and fraud in the stock market was partially responsible for the Great Depression The Securities and Exchange Commission (SEC) was established to oversee the buying and selling of stocks and bonds The Social Security system was also established as a part of the New Deal Regular payments to elderly/retired, disabled Unemployment compensation was also created during this time

Government Efforts Many of the measures put in place during the New Deal are still in effect today These measures still have not ended the economic challenges presented by the business cycle, but they have so far prevented another major depression Americans still disagree about the extent of government intervention in the economy

? List and briefly describe the four phases of the business cycle Draw the business cycle What pulled the country out of the Great Depression? What were the old theories about the business cycle? List and briefly describe one program that was established through the New Deal