Business Cycles and Fluctuations

Business Cycles are the regular ups and downs of real GDP Business Fluctuation is the rise and fall of real GDP over time in an irregular manner

Business Cycles: Characteristics and Causes Phases of the Business Cycle Recession – a period of time which real GDP usually declines for at least two quarters in a row or 6 consecutive months Begins when the economy reaches a peak and ends in a trough Expansion – a period of recovery from a recession Expansion continues until the economy reaches a new peak. When a new peak is reached, a new cycle begins

Business Cycles: Characteristics and Causes Changes in Investment Spending When the economy is expanding, businesses expect future sales to be high so they invest heavily When the spending for future growth slows or stops, the economy slows and a recession may result

Business Cycles: Characteristics and Causes Innovation and Imitation A new way of performing a task When a business innovates, it often gains an edge over competitors Other companies must imitate to remain competitive During times of innovation and imitation companies invest heavily and the economy booms

Business Cycles: Characteristics and Causes Monetary Policy Decisions When interest rates fall, spending increases, economy rises High spending causes demand to increase and interest rates rise, causing economy to slow External Shocks Things like oil prices, wars, and international conflict can have an effect on the economy

Business Cycles in the US The Great Depression Began on Black Tuesday, October 29, 1929 Lasted until 1933 GDP declined 50 percent from $103 billion to $55 billion Unemployment rose from 1.6 million people to 12.8 million people

Business Cycles in the US Recovery and Legislation Rise in government spending helped the economy to recover a small amount A number of laws and agencies were established from 1933 to 1940 Social Security Act passed in 1935 Securities and Exchange Commission created Federal Deposit Insurance Corporation (FDIC)

Business Cycles in the US Business Cycles after WWII Cycles were more moderate after WWII Shorter recessions and longer periods of expansion Average length of recession was 10 months and length of expansion was 54 months Reagan expansion lasted 8 years with no recession Clinton expansion lasted almost 10 years Small recession in 2001 followed by growth until 2008 Collapse of the housing market in 2007 caused recession from 2008-2009