THE BUSINESS CYCLE 1

Stages of the Business Cycle Expansion –increased output and employment –Increased Real GDP –A.K.A. Recovery Peak –Point of highest real GDP Contraction –Increased unemployment –Decreased output (decrease in real GDP) –Recession – lasts longer than 6 months (2 quarters) Lengthy recession becomes a depression Trough –Real GDP stops declining –Unemployment stops inclining

THE BUSINESS CYCLE The national economy fluctuates resulting in periods of boom and bust. A Recession is 6 month period of decline in output, income, employment, and trade. (If really bad…then depression) InflationUnemployment Full employment 3

1.Why is the business cycle like a roller coaster? 2.How do wars affect the economy? 200 Years of the Business Cycle 4

The Business Cycle Why does the economy fluctuate? Retailer and Producers send misleading information about consumer demand. Advances in tech, productivity, or resources. Outside influences (wars, supply shocks, panic). Macroeconomics measures these fluctuations and guides policies to keep the economy stable. The government has the responsibility to: Promote long-term growth. Prevent unemployment (resulting from a bust). Prevent inflation (resulting form a boom). Who cares? 5

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2010 GDP Growth Rate= 2.8%

What is Economic Growth? 1.An increase in real GDP over time 2.An increase in real GDP per capita over time (usually used to determine standard of living) Why is economic growth the goal of every society? Provides better goods and services Increases wages and standard of living Allows more leisure time Economy can better meet wants 8

Connection to PPC The same information shown on the business cycle can be shown on a production possibilities curve. 1.Full employment 2.Unemployment 3.Inflation The shifters of the PPC affect GDP 1.Change in quantity/quality of resources 2.Changes in technology 3.Changes in trade 9