1. The Business Cycle

2. The Business Cycle
Is a graph illustrating the relationship between real GDP and time.

3. Parts of the Business Cycle
1. Peak
The highest point of real GDP
2. Contraction
When real GDP is declining.
If a contraction lasts for 6 months (or two quarters), then it is considered a recession.
If a contraction continues for a long, sustained period, it may become a depression.

4. Parts of the Business Cycle
3. Trough
Lowest point of real GDP between the end of a contraction and the beginning of a recovery.
4. Recovery
When real GDP becomes positive after a period of negative real GDP.
This recovery period lasts until real GDP reaches the level of the previous peak.
After this level of real GDP is achieved, the growth in the real GDP is called an expansion (sometimes called prosperity)

5. Activity
Get a piece of computer paper and a variety of pencil crayons.
Arrange your paper so that it is in landscape position.
Draw EVERYTHING in pencil first in case you need to erase.
Use the full length and width of the paper.

6. Using the full length and width of the paper, draw your x-axis and your y-axis. Make sure you leave room for labels.
Label your Y-axis: Real GDP
Label your X-axis: Time
Draw and label the following on your graph:
Peak
Trough
Contraction
Recovery
Prosperity
Expansion

8. Label on your business cycle where each of the following would be found:
CPI (Inflation Rate)
CPI (Inflation Rate)
Unemployment Rate
Unemployment Rate
Real GDP
Real GDP

9. Answer the following questions on the back of your diagram
1. Why do you think expansion on your chart is divided between a recovery and prosperity? How do you find the start of prosperity?
2. During what phase of the business cycle would the government be worried about inflation?
3. Fiscal policy is the power of Congress to increase or decrease taxes and increase or decrease government spending. When the government is worried about inflation, tell whether you think they should increase or decrease taxes. Tell whether you think they should increase or decrease government spending.