2-2 Economic Conditions Change Objectives: –Describe the four phases of the business cycle –Explain causes of inflation and deflation –Identify the importance of interest rates Essential Question: –What causes the phases of the business cycle to change? 2.2

The Business Cycle Roller Coaster 2.2

The Main Idea In a market economy, there is an economic cycle, which includes four stages: prosperity, recession, depression, and recovery. These are also the four stages of the business cycle. In the last few decades, we have experienced the economic cycle a number of times. 2.2

Economic Cycle United States history has had patterns of good times to bad times back to good times. 2.2

Four Stages of the Business Cycle business cycle the rise and fall of economic activity The business cycle of one country can affect other trading partners. 2.2

Business Cycle The business cycle has four parts: Prosperity Recession Depression Recovery 2.2

Business Cycle Model Figure

Two partner groups Get with a partner In your most creative way possible, using construction paper, markers, color pencils etc Make a diagram of the Business Cycle Don’t just use the diagram I showed you, come up with a way that shows a 4 stage cycle occurring On the back of your paper research / list the four stages of the business cycle and 4 characteristics of each stage (Prosperity, Recession, Depression, Recovery) 2.2

Four Stages of the Business Cycle prosperity a peak of economic activity Prosperity is at the peak of the business cycle Demand for goods and services is very high.. Unfortunately, it cools down and activity slows down 2.2

Graphic Organizer Characteristics of Prosperity Higher wages Greater demand for goods to be produced More people buy houses, which creates work for builders People buy more goods from other countries, which benefits those countries 2.2

Four Stages of the Business Cycle recession when economic activity slows down Recession is when the economy slows down. May not be too serious or too long, but signals trouble for some people’s jobs. Ripple Effect-drop in related business. Ex – home builder 2.2

Recession A recession in one industry can cause a ripple effect throughout the entire economy. 2.2

Graphic Organizer Characteristics of a Recession Businesses produce less which means they need less workers  Unemployment increases People have less money to spend Fewer goods and services are produced The GDP declines 2.2

What caused the “Great Recession of 2008?” The Causes and Effects of the 2008 Financial Crisis So what the difference between a recession and depression? 2.2

Depression If a recession deepens and spreads throughout the entire economy, a nation may move into a depression. depression A phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures. 2.2

Graphic Organizer Characteristics of a Depression High unemployment Low production of goods and services Can last for several years Spreads to other countries High number of unused manufacturing facilities Very rare 2.2

Depression The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression. Great Depression Video #1 Great Depression Video 2.2

Graphic Organizer The Great Depression The GDP fell nearly 50 percent Unemployment rose nearly 800 percent The average manufacturing wage was 5 cents an hour Many banks around the country failed The money supply fell by one-third Many towns and other civic bodies printed their own money 2.2

Recovery Economic downturn doesn’t go on forever. Gradual process Production starts to increase during a recovery. recovery a rise in business activity after a recession or depression 2.2

Recovery Characteristics of a Recovery People start going back to work People have money to purchase goods and services Demand for goods and services stimulates more production New businesses open Businesses become more innovative 2.2

Recovery In 1939, the United States was beginning to recover from the depression when World War II began. The war increased the rate of recovery because of the demand for production. What things were produced? 2.2

Consumer Prices Inflation –The buying power of the dollar decreases –If prices increased 5% during the last year, items that cost $100 then would now cost $105. –Ex: “Back when I was a kid…..a candy bar was 45 cents!” 2.2

Rate of Inflation With inflation, one’s buying power decreases. inflation An increase in the general level of prices. 2.2

Rate of Inflation Causes of Inflation When demand is greater than supply War Increase in the price of raw materials Increase in expenses Increase in salaries Too much money circulating in the economy 2.2

Deflation Deflation can occur when the supply of goods is greater than the demand. deflation a general decrease in the price of goods and services 2.2

Graphic Organizer Economy produces more goods than people want. Sellers lower prices. Sellers cut production. People have less money to buy goods. Demand continues to go down. Deflation 2.2

1.What is the stage that follows a recession or depression? The recovery stage can happen after either a recession or a depression. 2.2

2.What is the difference between a recession and a depression? A recession is a slight downturn; a depression is a major downturn. 2.2

3.Why may innovation play an important role in the recovery stage of a business cycle? Innovation creates demand that leads to more employment and production, which leads to more demand. 2.2