Business Cycles. Characteristics & Causes Business Cycles – Regular ups & downs of Real GDP Business Fluctuations – Rise & fall of Real GDP over time.

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Presentation transcript:

Business Cycles

Characteristics & Causes Business Cycles – Regular ups & downs of Real GDP Business Fluctuations – Rise & fall of Real GDP over time in an irregular manner Both interrupt economic growth periodically

Phases of Business Cycle Recession – Real GDP declines for 2 consecutive quarters; Begins at peak, ends at trough. Expansion – Recovery from recession; Begins at trough, ends at peak. Severe recessions become depressions

Causes of the Business Cycle External Shock – Can be good or bad Changes in Investment Spending – Businesses spend more or less on capital Changes in Monetary Policy – FED adjusts interest rates to make borrowing easy or difficult Fiscal Policy Shocks – Changes in government spending or taxation Speculation & Bubbles – Anticipated growth Many times multiple factors work together to create the cycle

The Great Depression Began Oct. 29, 1929 – Black Tuesday – Stock market crashed GDP declined almost 50% Unemployment rose almost 800% Average wages dropped from 55¢ to 5¢ Many banks failed & depositors lost their money Money supply fell 33%

Causes of the Great Depression Big gap in distribution of income Easy credit encouraged too many loans Global economic conditions led to decrease in U.S. exports

Recovery & Legislative Reform Great Depression ended partially because of an increase in government spending Spending during WWII provided stimulus Reforms established between 1933 & 1940 Social Security Minimum Wage Unemployment Programs Security & Exchange Commission (SEC) Federal Deposit Insurance Corporation (FDIC)

Business Cycles Post-WWII Shorter recessions, longer expansion Recessions less frequent after 1980 Long periods of peacetime expansion during Reagan & Clinton administrations Most recent recession began in 2007

Great Recession of Lasted from December 2007 to June 2009 Worst recession since Great Depression Real GDP dropped 4.5%, recovered in 2011 Unemployment doubled, still hasn’t recovered Many lost houses & cars cause they couldn’t make payments Some forced to use retirement & go into debt to survive