Impact of Business Cycles Boom or Bust Economics LAP 9

Objectives: Impact of Business Cycles Explain the phases of a business cycle. Summarize causes of business cycles. Boom or Bust Economics LAP 9

Explain the phases of a business cycle.

 Rosalie works as a babysitter.  Her income is not steady. Sometimes, they have loads of money. At other times, they don’t go out at all.  Everyone experiences economic ups and downs.  The parents who hire her don’t have a very stable amount of spending money.

What Are Business Cycles?  Economic fluctuations  Ups and downs in our economy  Periods of expansion and contraction in economic activities  Economic fluctuations  Ups and downs in our economy  Periods of expansion and contraction in economic activities

The Impact of Business Cycles  Business cycles affect every economic activity, including Production Consumption Production Consumption Exchange Distribution Exchange Distribution

 When real GDP increases: Economic activities increase. The economy grows. Economic activities increase. The economy grows. Economic activities decrease. We experience an economic decline. Economic activities decrease. We experience an economic decline. Business Cycles and Real Gross Domestic Product ( GDP )  When real GDP decreases:

Business Cycles and Other Economic Indicators Unemployment  When our unemployment rate goes up, our economy declines.  When the unemployment rate goes down, our economy grows. Inflation  When inflation goes up, our economy is booming.  Inflation drops when economic activities slow down.

Benefits of a Growing Economy  Providing a higher standard of living  Creating new and additional jobs  Enabling the government to fulfill its duties more thoroughly  Resolving domestic problems

Avoiding the Extreme Ups and Downs By understanding whether business activities are getting ready to expand or contract, business leaders can take steps to avoid extreme economic ups and downs.  They can anticipate necessary changes in: Employment Production Employment Production Pricing Purchasing Pricing Purchasing

The Unpredictability of Business Cycles  There is no way to accurately predict the length or severity of business cycles.  It’s also difficult to predict the exact beginning and ending of a business cycle.  Business cycles are inherently irregular.

Phases of Business Cycles  Expansion  Peak  Contraction  Trough

Economic Expansion

Business profits go up. New businesses open. Existing businesses invest in new equipment. It is a time of economic prosperity and growth. Consumers’ incomes increase.  They spend more money on durable goods.

Economic Expansion Production increases. Demand increases. More workers are hired. Additional business facilities are built. It is a time of economic prosperity and growth.

Economic Expansion Interest rates on loans decrease. Consumers and producers borrow and spend more money. The Federal Reserve System puts more money into circulation.

Reaching the Peak  Economic prosperity eventually reaches a high point—the peak.  Demand for many products begins to exceed the supply. Prices rise.  Demand for low-interest-rate loans exceeds their availability. Interest rates rise.

 Consumers and producers begin to feel less hopeful about the future. They start to save more and spend less. Demand declines. Economic activities level off. Reaching the Peak

Economic Contraction  When demand starts to fall and unemployment rises, contraction begins.  It is a bad time for consumers and businesses. Consumers continue to spend less and save more. Businesses postpone purchasing new equipment. Few new businesses are started. Businesses earn less profit, experience losses, or close.

Economic Contraction  It is a bad time for consumers and businesses. Businesses decrease production. Sales are sluggish. Inventories build up. Workers lose their jobs or experience a drop in pay.

Economic Contraction  It is a bad time for consumers and businesses. Demand falls. Businesses decrease prices to attract customers. Interest rates decrease. Economic activities diminish.

Economic Contraction  During a contraction, social problems often increase. Poverty Crime Alcoholism Marital problems Suicides

Economic Contraction  Some contractions become recessions or depressions.  Characteristics of a recession: A contraction that is at least six months long Unemployment as high as 10 or 12%

Economic Contraction  Characteristics of a depression: A recession that continues and is severe Many business failures Unemployment as high as 25%

Entering the Trough  The trough is the low point of economic activity. Many more businesses fail. Unemployment is very high.

 The economy will stay at this low point until consumers and producers become hopeful about business and buy more products.  A trough is sometimes seen as a positive sign—hitting rock-bottom implies that a recovery is on its way. Entering the Trough

Summarize causes of business cycles.

Causes of Business Cycles  Multiple factors cause business cycles.  A change in one factor leads to changes in others.  Causes of business cycles can be divided into two major categories: Internal External

Internal Factors Take place within the economic system itself

Internal Factors: Aggregate Demand  Is the total demand for an economy’s products  Can pull the GDP and employment up or down to cause business cycles

Internal Factors: Aggregate Demand  Rises when consumers want more products Supply Demand Demand-pull inflation  Demand-pull inflation: Inflation that occurs because aggregate demand exceeds the available supply. Production increases. More workers are hired. Employees earn more wages. Production may not be able to meet the growing demand, which results in inflation (higher prices).

Internal Factors: Aggregate Demand  If aggregate demand decreases: Production and employment decrease. Inventories build up. A recession or depression can result. Production and employment decrease. Inventories build up. A recession or depression can result.

 Money supply: The total quantity of money which exists at one time in a nation  If a nation’s money supply goes up or down, the economy soon follows. Internal Factors: Money Supply

 The government restricts the flow of money by: Raising taxes Raising interest rates Buying less The federal government can manipulate the money supply through monetary and fiscal policy. Internal Factors: Money Supply

 The government increases the amount of money in circulation by: Spending more Lowering interest rates Lowering taxes The federal government can manipulate the money supply through monetary and fiscal policy. Internal Factors: Money Supply

 More money is borrowed.  Production increases.  More work is available.  Unemployment is low.  Economic activities grow. When interest rates are low and money is plentiful: Internal Factors: Money Supply

 Unemployment is high.  Business activities slow down.  A period of contraction begins. When money is in short supply: Internal Factors: Money Supply

Internal Factors: Investment in Capital Goods  When producers are hopeful about the future, they: Buy new equipment Build new business facilities Expand their existing facilities Cause economic activities to expand Buy new equipment Build new business facilities Expand their existing facilities Cause economic activities to expand

Internal Factors: Inventory Levels  When producers are optimistic about business: They increase their inventory levels to prepare for expected increases in demand. Economic activities expand. They increase their inventory levels to prepare for expected increases in demand. Economic activities expand. Increase inventory levels

Internal Factors: Inventory Levels  When producers become less hopeful: They decrease their buying of new goods and focus on selling their current inventory. The economy contracts. They decrease their buying of new goods and focus on selling their current inventory. The economy contracts.

External Factors Take place outside the economic system

External Factors: Political Changes  A change in the political party can cause changes in economic activities.

External Factors: Climatic Changes  Jobs in agriculture and construction vary according to climatic conditions.  Drought, floods, and blizzards can negatively affect the economy.

External Factors: International Relations  The interaction of our nation with other countries impacts the economy.

External Factors: Discoveries and Innovation  The discovery and / or development of new products, techniques, and resources often stimulate our economy. H.P. flexible computer screen in research and development Large sums of money must be invested. New jobs are created. Large sums of money must be invested. New jobs are created.

External Factors: Psychological Changes  People’s emotional reactions to life-altering national or international events can expand or contract the economy.

Which phase of the business cycle are we experiencing? How have you been affected? Are you doing better or worse? What will the economy look like in a year? How can you prepare for that future?

 Some economists claim that elected officials use business cycles to achieve their own political goals.  Supposedly, government leaders cause the economy to: Expand before an election Contract after being reelected

 Is this possible?  Do our elected leaders cause business cycles?  If so, is it ethical?  Why or why not?

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