1 Economic Cycle  Economic Cycle = one complete movement from peak to peak (or trough to trough)  Peak = height of economic prosperity.  Contraction = downturn in the economy.  Expansion = period of positive economic growth.  Recession = period when national economic growth is negative for 2 or more consecutive quarters.  Trough = lowest point in the cycle.

2 Economic Cycle Trough Contraction Expansion Peak Time ===> % Nat. Econ Growth Recession

3 Four Stages of an Economic Cycle Examples of historical cycles (trough to trough): , , , , ,

4 Making Economic Forecasts  Why do families and households care about economic forecasts? Implications for the costs of borrowing Implications for the benefits of saving Implications for the mix of human, physical, and financial capital families should hold Implications for risk management

5 What indicators can/do help families make accurate forecasts?  Business cycle information - i.e., what is happening to real national economic growth. Where have we been recently?  Recent rates of inflation (look to CPI)  The spread between long- and short- term interest rates (comparison between 10-yr bonds and 3-6 month T-bills)