1. Chapter 12 Section 2

2. Economic growth-A steady, long-term increase in real GDP.
Business cycle- A period of macro-economic expansion followed by a period of contraction.
Expansion- A period of economic growth as measured by a rise in real GDP.
Economic growth-A steady, long-term increase in real GDP.

3. Recession-a prolonged economic contraction.
Trough-the lowest point in an economic contraction, when real GDP stops falling.
Recession-a prolonged economic contraction.
Depression-a recession that is especially long and severe.

4. Businesses, too, look to interest rates in deciding whether or not to purchase ne equipment, expands their faculties, or make any other large investments that must be financed. When interest rates are low, companies barrow money to make new investments, often adding jobs to the economy. When interest rates climb, investment dries up, as does job growth.

5. At some point, firms may decide that they have expanded enough or that demand for their products is dropping. In the United States economy, consumers often use credit to purchase “big ticket” items—from new cars and houses to home electronics, appliances, and vacations. The cost of credit is the interest rate that financial institutions charge there cusomers.

6. Stagflation-a decline in real GDP combined with a rise in the price level. Leading indicators-key economic variables that economists use to predict a new phase of a business cycle. When the economy is expanding, firms expect sales and profits to keep rising.

7. Contraction- A period of economic decline marked by falling real GDP.
Peak- The height of an economic expansion, when real GDP stops rising.
Contraction- A period of economic decline marked by falling real GDP.
Many economic analysts and historians of the 19th century recognized economic panics and collapses. But most didn’t see a pattern in the occurrence of these changes.

8. External shocks can dramatically affect an economy's’ aggregate supply
External shocks can dramatically affect an economy's’ aggregate supply. Examples of negative external shocks include disruptions of the oil supply, wars that interrupt normal trade relations, and droughts that severely reduce or crop harvests. Oil is used to produce many goods, and petroleum products fuel the trucks, trains, and airplanes that transport goods from factories to stores.

9. As consumers reduced their spending, the economy entered a recession
As consumers reduced their spending, the economy entered a recession. The ride and fall of barrowing rates has a great impact on the level of spending and real GDP in the economy. Consumers spending is determined partly by consumers’ expectations.

10. One early economist did see a pattern, however
One early economist did see a pattern, however. He attributed it to, of all things, sunspots. In a way his theory wasn’t so crazy. William Stanley Jevons, a British economist of the mid-1800’s. believed that periodic sunspot activity affected crop harvests. In the 1800’s , when most people worked on farms, crop surpluses and shortages would have had widespread economic effects.

11. The negative shock raises costs of production and prices of final goods throughout the economy. The aggregate supply (AS) curve shifts to the left, reflecting higher prices and lower real GDP. It is particularly harmful to businesses and households and difficult for policymakers to fix.

12. An economy may also enjoy positive external shocks to its aggregate supply. A growing season with a perfect mix of sun and rain may create bountiful harvests that drive food prices down. External shocks usually come without much warning. The other key factors capable of pushing an economy from one phase of the business cycle to another are more predictable.

13. Economists long ago dismissed Jevons’s sunspot theory, but they embraced his notion that the economy undergoes periodic changes. A modern industrial economy repeatedly experiences cycles of good times, and then good times again. Business cycles are of major interests to macroeconomists, who study their causes and effects.

14. Predicting changes in a business cycle is difficult for a number of reasons. To predict the next phase of a business cycle, forecasters must anticipate movements in real GDP before they occur. Government as business decision makers need to accurate economic predictions to respond to changes in a business cylce.

15. Economic activity in the United States has indeed followed a cyclical pattern. Periods of GDP growth alternate with periods of GDP decline. As the effects of the Great Depression spread throughout the world, it Affected economists beliefs about the macroeconomy.

16. Many economists accepted Keynes’s idea that government intervention might be needed to pull an economy out of a depression. The depression also affected American politics. Programs such as the Works Progress Administration and the Civilization Conservation Corps got able-bodied workers back on the job earning income,

17. Business cycles are not minor ups and downs
Business cycles are not minor ups and downs. They are major changes in real GDP above or below normal levels. The typical business cycle consists of 4 phrases;
Expansion, which is a period of economic growth as measured by a rise in real GDP. In economists’ terms, economic growth is a steady , long-term increase in real GDP. In the expansion phrase, the economy as a whole enjoys plentiful jobs, a falling unemployment rate, and business prosperity.

18. Peak, which is when real GDP stops rising, the economy has reached its peak, the height of an economic expansion.
Contraction, which is , after reaching its peak, the economy enters a period of contraction, an economic decline marked by falling real GDP. Falling output generally causes unemployment to rise.
Also
Trough, which is, when the economy has “bottomed out,” it has reached the trough, the lowest point in an economic contraction, when real GDP stops falling.

19. Thankfully, no economic downturns since the 1930’s have been nearly as severe as the Great Depression. We have had recessions, though. In the 1970’s, an international cartel, the Organization of Petroleum Exporting Countries (OPEC), launched an embargo on oil shipped to the United States and quadrupled the price of its soil.

20. These actions caused external shocks in the American oil market
These actions caused external shocks in the American oil market. As oil prices sky rocketed, raw material costs rose, and the economy quickly contracted into a period of stagflation. Reeling from higher-than-ever prices for gasoline and heating fuel prices, Americans began looking for ways to conserve energy.

21. Economists’ created terms to describe contractions with different characteristics and levels of security, which include:
Recession, which is, if real GDP falls for two consecutive quarters(at least 6 straight months), the economy is said to be in a recession. It’s a prolonged economic contraction. Generally lasting from 6 to 18 months, recessions are typically marked by unemployment rising into a range of 6 to 10 percent.

22. Which they would then spend supporting their families
Which they would then spend supporting their families. Now until the United States Entered into World War 2 did the country completely recover from the Great Depression. The sudden surge in government defense spending boosted red GDP well above pre-depression levels.

23. Depression, which is, if a recession is especially long and severe it may be called a depression. The term has no precise definition but usually refers to a deep recession with features such as high unemployment and low factory output.
AND
Stagflation; This term combines stagnant- a word meaning unmoving or decayed- and inflation. Stagflation is a decline in real GDP (output) combined with a rise in the price level (inflation).

24. Although economists know much about business cycles, they cannot predict any one cycle’s behavior, nor can they tell exactly hoe long its phases will last. The only certainty is that a growing economy will eventually experience a downturn and will later bounce back.

25. The shifts that occur during a business cycle have many causes, some more predictable than others. Often, 2 or more factors will combine to push the economy into the next phase of a business cycle. Typically, a sharp rise or drop in some important economic variable will set off a series of events that bring about the next phase.

26. Business cycles affected by four main economic variables:
Business investment
Interest rates and credit
Consumer expectations
External shocks

27. Once again the United States had suffered an economic downturn, although not as severe as the Great Depression. There were additional problems in the late 1970’s and early 1980’s. High interest rates and other factors caused real GDP to fall and the unemployment to rise to over 9% in the early 1980’s.

28. They turned down their heat, bought smaller, more fuel-efficient cars, and became researching energy alternatives to petroleum. When the United States and other nations developed more of their own energy resources, OPEC finally lowered its oil prices.

29. Following the brief recession in 1991, the U. S
Following the brief recession in 1991, the U.S. economy grew steadily during the 1990’s, with real GDP rising each year. The record growth, low unemployment, and low inflation caused some economists to suggest that the nature of business cycles was changing. Perhaps, they speculated, we are learning how to control recessions and promote long-term growth

30. In 1999, president Bill Clinton and congressional leaders debated the size of a tax cut for Americans. Their proposals were based on expectations of a healthy economy and high tax revenues for the foreseeable future. The U.S. economy has been moving toward a service economy. Some economists believe that an economy based more on services than on manufacturing is more stable.

31. Some economists say that the demand for services is less changeable than demand for capital equipment, since capital demand depends so much on interests rates. The business cycle can slumber for long periods, but most economists expect that it will awaken again.

32. What is Leading indicators?
Questions:
What is Leading indicators?
Key economic variables that economists use to predict a new phase of a business cycle.

33. What is a Trough?
The lowest pt. in an economic contraction, when real GDP stops falling

34. What is a Recession?
A prolonged economic contraction

35. What is a Depression?
A recession that is very ,very long

36. What is Stagflation?
A decline in real GDP combined with a rise in the price level

37. What is Contraction?
A period of economic decline marked by falling real Decline

38. What is a Peak?
The height of an economic expansion, when real GDP stops rising

39. What is Economic growth?
A steady, long-term increase in real GDP.

40. What is Expansion?
A period of economic growth as measured by a rise in real GDP.

41. What is Business cycle?
A period of macroeconomic expansion followed by a period of contraction