1. 2-2 Economic Conditions Change
Goal 1 Describe the four phases of the business cycle.
Goal 2 Explain causes of inflation and deflation.
Goal 3 Identify the importance of interest rates.

2. KEY TERMS business cycle prosperity recession depression recovery
inflation
price index
deflation

3. THE BUSINESS CYCLE Prosperity Recession
workers working, wages good, businesses producing, GDP increasing
Recession
Demand decreases, businesses lower production, unemployment rises, GDP slows for 2 or more quarters of the calendar year

4. THE BUSINESS CYCLE Depression Recovery
Prolonged period of unemployment, weak consumer sales, and business failures. GDP falls rapidly
last depression – 25% unemployed, many unable to satisfy basic needs
Recovery
Unemployment decreases, demand increases and GDP begins to rise again

5. Checkpoint  What are the four phases of the business cycle?
Prosperity
Recession
Depression
Recovery

6. CONSUMER PRICES
Have you ever noticed that packages of some items get smaller while the price stays the same?
Have you bought new technology products that are less expensive than earlier ones?
These are examples of the changes in the buying power of your money

7. CONSUMER PRICES Inflation – increase in general level of prices
buying power decreases-costs more for same items
Causes of inflation
Demand greater than supply
Wages rise but not fast enough to catch rise in goods and services

8. CONSUMER PRICES Measuring inflation
Late 50’s early 60’s a.i.r. 1 to 3%
Late 70’s early 80’s a.i.r. 10 to 12%
Mild inflation stimulates economy -wages rise slower than cost of goods, businesses make higher profits, expands production, hires more workers

9. CONSUMER PRICES Measuring inflation Deflation
CPI – Consumer price index
Compares prices in a given year to a base year
Different types
i.e. cost of necessities may increase faster than that of nonessential items that could be dropping. Results in a much lower rate than actual COL experienced
Deflation
Decrease in general level of prices
Prices are lower, but people have less $ to buy

10. Checkpoint  What are the main causes of inflation?
Inflation is an increase in the general level of prices that occurs when the demand for goods and services is greater than supply.

11. INTEREST RATES The cost of money
Higher rates mean higher costs for businesses

12. INTEREST RATES Types of interest rates
Prime- available to best customers
Discount rate – amount charged by Fed Reserve to banks
T-bill rate – yield on short term U.S. Gov. debt
Treasury bond rate – yield on long term U.S. Gov. debt
Mortgage rate – amount individuals pay to borrow for homes

13. INTEREST RATES Types of interest rates
Corporate bond rate – cost of borrowing for large U.S. corporations
Certificate of deposit – rate for time deposits at savings institutions

14. INTEREST RATES
Interest rates can encourage or discourage borrowing and spending.
Lower interest rates allow consumers greater spending power, which increases demand, productivity, and employment.
Businesses often pass on the cost of higher interest rates to consumers.

15. Checkpoint 
How do interest rates affect business activities in our economy?
Interest rates can encourage or discourage borrowing and spending.
Lower interest rates allow consumers greater spending power, which increases demand, productivity, and employment.
Businesses often pass on the cost of higher interest rates to consumers.