Unit 3: Macroeconomics Lesson 2: Business Cycles

Definitions business cycle: major fluctuations in economic activity that impact the GDP

Definitions Phases ● expansion: a period of steady growth ● peak: the height of economic expansion ● contraction: a period of decline ● trough: the “bottoming out” of economy

Definitions Characteristics of Contractions ● recession: GDP falls for two consecutive quarters or six straight months ● depression: an especially long and severe recession ● stagflation: a decline in GDP combined with a rise in price level

Influences on Business Cycle Business Investment: business spending on capital goods (physical and human) ● high levels of investment promote expansion ● low levels of investment contribute to contraction

Influences on Business Cycle 2. Interest Rates: the cost of credit that financial institutions charge to customers ● low interest rates increase borrowing, which promotes expansion ● high interest rates decrease borrowing, which contributes to contraction

Influences on Business Cycle 3. Consumer Expectations: future expectations about the economy ● prosperous outlook increases spending and promotes expansion ● negative outlook decreases spending and contributes to contraction

Influences on Business Cycle External Factors: global events that affect the economy’s aggregate supply can contribute to expansion or contraction

U.S. Real GDP Billions of Dollars U.S. Enters the Great War FDR’s New Deal & Start of WWII Stock Market Crash & Start of Depression Billions of Dollars

Predicting Business Cycles Leading Indictors: anticipate the direction of the economy, such as building permits Coincident Indicators: change with economy and provide current status, such as personal income or sales volume Lagging Indicators: change months after upturn or downturn and provide information related to duration, such as business incomes