Economic Instability Macroeconomics Principles

Business Cycles Cycle: Systematic ups and downs of GDP Natural Inevitable Necessary? Phases –Recession: 2+ quarters of GDP decline –Expansion: GDP increase Points –Peak: Point where real GDP stops going up –Trough: Point where real GDP stops going down Depression: steep fall in GDP, high unemployment, over a year in length

Expansion Recession The Phases of the Business Cycle Boom Secular growth trend Downturn Upturn Trough Peak 0 Jan.- Mar Total Output Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

GDP FALLING INFLATION FALLING UNEMPLOYMENT RISING GDP RISING INFLATION RISING UNEMPLOYMENT FALLING

Note: Shaded areas indicate recessions. Real GDP , in 2000 dollars Note: “Years” is on horizontal axis and “real GDP” is on vertical axis. General trend of economic growth Recession years are shaded blue: note downward slope on graph indicating that GDP is decreasing.

Post-World War II Recessions* *The February 1945–October 1945 recession began before the war ended in August Note: These recessions were of varying duration and severity.

Another Look at Expansions and Recessions Can you find a pattern? Neither can economists! That’s why recessions are hard to predict.

Causes of Business Cycles Changes in C, G, I, or X Fiscal Policy Monetary Policy Shocks War –9/11 Attacks Oil supply and prices –1973 Arab oil embargo Bubbles – Stock Market – Dot-com Bubble – Housing Bubble

THE PHASES OF BUBBLE INVESTING

FEARGREEDCONFIDENCEEXUBERANCEPANIC

EOCT Question Over a two-year period, the nation of Parthia experiences a decline in unemployment rate, a rise in real GDP, and a stabilized price level. Parthia appears to be A. At the start of a recession B. In the middle of a depression C. Stagnating economically D. In the middle of a boom period