Business Cycle Series of periods of growing and shrinking economic activity Measured by increase/decrease in RGDP

4 Phases 1. Expansion: economic activity begins to increase (RGDP increasing, UE down) 2. Peak: period of increase econ. activity 3. Contraction: period of slowed econ. activity (UE increasing) 4. Trough: lowest level

2 Categories of Business Changes 1. Recession: 2 or more consecutive fiscal quarters of declining GDP Producers/consumers scale back UE increases 2. Expansion: Spending and production increases Prices increase UE decreases Q1- Oct. 1st through the end of Dec. Q2 Jan 1st through the end of March Q3 April 1 through the end of June Q4 July 1 through the end of Sept.

Monetary Policy Monetarists Feds power to control money supply and credit Believe competitive markets provide econ. stability Less inclined to support govt. interaction FEDERAL RESERVE (3 Tools) ADAM SMITH “Wealth of Nations” Laissez faire

FISCAL POLICY Keynesians Use of federal govt. power to tax and spend to regulate econ. activity Instability is inherent in free market system Support govt. intervention John Keynes (1930s) Before Keynes: balance budget Prior to Great Depression govt. spending was 10% of GDP FDR--> New Deal changes--> Deficit Spending Provides framework for GDP formula

Government Budget Deficit Surplus Expenditures exceed revenues Expenditures are less than revenues

National Debt vs. Deficit TOTAL amount owed by govt Deficit YEARLY amount Add all deficits and subtract few surpluses=ND The United States has had a public debt since its founding in 1791. Debts incurred during the American Revolutionary War and under the Articles of Confederation amounted to $75,463,476.52 on January 1, 1791.

How big is this number? There are one million millions in a trillion. One trillion is more stars than there are in the entire Milky Way galaxy 12 Trillion $1 bills, laid end to end, side to side, would pave every interstate, highway, and country road in America -- twice. A trillion $10 bills, taped end to end, would wrap around the Earth more than 380 times. You could spend $10M a day and it would still take you 273 years to spend $1 trillion

DOES IT AFFECT YOU? Transfer of purchasing power to public sector Larger Debt = Larger Interest payments = More Taxes = Less Spending 2. Taxes needed to pay interest Decrease incentive to work Who owns our debt? What would happen if we defaulted?