1. 2.2 Economic conditions change
The business cycle
Inflation and deflation
Interest rates

2. Check stocks
Get ready for a powerpoint on the business cycle
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3. THE BUSINESS CYCLE Prosperity Recession Depression Recovery
All economies have good times and bad.
This movement of the economy from good to bad to good is called a business cycle.
Recurring ups and downs of GDP
Business cycle has four phases:
Prosperity
Recession
Depression
Recovery

4. PROSPERITY Peak of the business cycle Unemployment is low
Businesses produce G&S in record numbers
Wages are good
GDP is increasing
Demand for G&S is high
Does not go on forever, eventually activity slows down

5. RECESSION The economy slows down Demand decreases
Businesses lower production
Unemployment rises
GDP slows for two or more quarters
May not be serious but often signals trouble
Can cause the ripple effect

6. Depression
When a recession deepens and spreads throughout the entire economy
Long period of high unemployment
Weak consumer sales
Business failures
GDP falls rapidly
USA has not had a depression in 70 years
During the Great Depression between , unemployment was 25%

7. recovery Economic downturns do not last forever,
Unemployment begins to decrease
Demand for G&S increases
GDP begins to rise
Because people gain employment, they regain confidence about their future and begin buying again
As it continues, the nation moves to prosperity

8. INFLATION AND DEFLATION
Inflation is the increase in the general level of prices
Buying power decreases
It takes more $ to buy the same things
Most harmful to people on fixed incomes
Causes of Inflation
When demand for G&S is higher than supply
When $ is spent for goods that are in short supply

9. DEFLATION Opposite of inflation
Decrease in the general level of prices
Usually occurs during recessions and depressions
Prices are lower, but people have less money
During the Great Depression prices lowered 25%

10. Measuring inflation Mild inflation can stimulate the economy (2-3%)
Wages rise more slowly than the prices of products
Producers make higher profits, expand production and hire more workers
New workers increase spending and the total demand increases
The Consumer Price Index (CPI) compares prices in one year with prices in some earlier base year

11. Interest rates Cost of money
Higher interest rates mean higher business costs
People with poor credit ratings pay a higher interest rate

12. Types of interest rates
PRIME RATE – Rate banks make available to their best business customers (large corporations)
DISCOUNT RATE – Rate banks are charged to borrow money from the Federal Reserve banks
T-BILL RATE – Yield on short-term (13wk)U.S. government debt obligations
TREASURY BOND RATE – Yield on long-term (up to 30 years) U.S. government debt obligations

13. CORPORATE BOND RATE – The cost of borrowing for U.S. corporations
MORTGAGE RATE – Rate individuals pay to borrow for a purchase of a new home
CORPORATE BOND RATE – The cost of borrowing for U.S. corporations
CERTIFICATE OF DEPOSIT RATE – Rate for time deposits at savings institutions
In conclusion:
The supply and demand for money is the major influence on the level of interest rates
As amounts saved increase, interest rate decline
When amounts borrowed increase, interest rates increase