Business Cycles

The Business Cycle Boom/Peak Contraction & Recession Expansion & Recovery There is limited discussion in the text concerning business cycles, however, it appears on pages 12-14. The activities in an economy fluctuate over a period of time This fluctuation is called the business cycle Periods of high or low activity can last for months or years Expansion: Greater Activity includes recovery, prosperity Contraction: Lesser Activity includes cooling down, recession and depression recession: any decrease in activity that results in decreased employment, decreased income, and limited production may be caused by loss of major industries or corporations, or by trends beginning from outside the nation depression: a prolonged recessionary period resulting in severe loss of income, productivity and employment Instructors may wish to facilitate discussion by asking students to describe what occurs in a recession. An alternate approach, have students research recessions in Canada. Have them bring to class statistics as well as dates, and discussions of major downtrends across the country. Focus on the regional differences across Canada with regards to economic trends. One coast can be in poverty while the other is in growth. There are no discussion questions on this topic in the text. Alternate questions appear below. These may be challenging for some students. 1. How can you tell when the economy is growing? List some indicators of growth. 2. How can you tell when the economy is approaching a recession? Are there indicators? Depression Recovery 18 18

The business cycle is the cycle of expansion and contraction in the economy. Time Real GDP Long-run trend of output Expansion Peak Contraction Trough

An expansion is a sustained rise in the real ouput of an economy A contraction is a sustained fall in the real output of an economy A peak is the point in the business cycle at which real output is at its highest A trough is the point in the business cycle at which real output is at its lowest

When actual output exceeds potential output, the resulting inflationary gap is the difference between the real output (point a) and potential output (point b). Real output then falls below its potential level. In this case, the recessionary gap is the amount by which real output falls short of its potential (the difference between point c and d). Time Real GDP Peak Trough Long-run trend of output (potential) a b Inflationary Gap c d Recessionary Gap

Assignment Using your text, summarize the following: the role of expectations on a contraction and expansion the effects of a contraction/expansion recession/depression