SSEMA1 The student will illustrate the means by which economic activity is measured. E. Define the stages of the business cycle; include peak, contraction, trough, recovery, expansion as well as recession and depression.

Business cycles Systematic changes in real GDP marked by alternating periods of expansion and contraction.

Recession Real GDP declines (contraction), unemployment rises for 2 quarters (6 months) Begins at the peak: point where economy stops going up Ends at the trough: the point where economy stops going down –or-turnaround point

Depression a severe recession. Has large unemployment acute shortages excess capacity in manufacturing.

Recovery Recovery: when real GDP becomes positive after a period of negative GDP. Boom: When the recovery passes the previous peak. Sometimes called prosperity.

Expansion Expansion: period of recovery from a recession. Trend line: a steady growth path.

Contractions typically GDP decreases The economy shrinks, unemployment increases (cyclical) reduced spending. To ease impact of recession = government cut taxes

Expansions typically production increases resources are being utilized. GDP increases unemployment decreases inflationary pressure rises.

Causes of the Business Cycle Capital Expenditures Expanding economy businesses expect high sales in future invest in new plants, machinery, etc. Stop when they have enough Layoffs begin Start of recession

Causes of the Business Cycle Inventory Adjustments First sign of trouble, cut back on inventories Possible a self-fulfilling prophecy First sign of recovery, build back up Clearest after WWII

Causes of the Business Cycle Innovation: puts new products on the market makes other products obsolete businesses more efficient = costs go down, profits increase, business grows. Imitators invest heavily to catch up, investment boom follows Market stabilizes, boom ends

Causes of the Business Cycle monetary factors Credit and loan policies of Federal Reserve System Easy money policies = low interest rates, loans easy to get Borrowing and lending slow down, economic activity declines. 2007 bubble burst

Causes of the Business Cycle external shocks Increase in oil prices Wars International conflict Some drive economy up Others drive economy down