1. Business cycle
Econ 1a

2. Recession
A significant decline in the economy’s output, such as during six months.

3. The points of inflection
Moments in time when the rate of growth or decline switches signs.
First derivative, rate of growth
Second derivative, change in the rate of growth.

4. What drives the cycle?
Y=C+I+G+X-M

5. Investment drives the cycle
Consumer spending is more stable.
Changes in investment drive the cycle.
Big fall in investment: GDP falls.
Recovery of investment: GDP rises.

6. Cause of the business cycle
Large subsidies to real estate:
1. Tax advantages.
2. Mortgage guarantees.
3. Fannie and Freddie subsidized
4. Public goods subsidy.
5. Money expansion: cheap credit.

7. Land value boom
Cheap credit and other subsidies fuel land purchase and construction of buildings.
Speculation adds to land price rise.
Money expansion slows.
High real estate prices plus higher interest rates choke expansion.

8. The crash Real estate prices plateau.
End of real estate expansion: unemployment rises.
Land value fall, mortgages default.
Banks fail. Demand falls.
Business failures, higher unemployment.
Government bails out financial firms.

9. The remedy Eliminate the cause: subsidy to r.e.
Tax most of land value or land rent.
Replace central banking with free-market banking; let the free market set the money supply and the natural rate of interest.