2. SSEMA1 The student will illustrate the means by which economic activity is measured.
E. Define the stages of the business cycle; include peak, contraction, trough, recovery, expansion as well as recession and depression.

3. Business cycles
Systematic changes in real GDP marked by alternating periods of expansion and contraction.

4. Recession
Real GDP declines (contraction), unemployment rises for 2 quarters (6 months)
Begins at the peak: point where economy stops going up
Ends at the trough: the point where economy stops going down –or-turnaround point

5. Depression a severe recession. Has large unemployment acute shortages
excess capacity in manufacturing.

6. Recovery
Recovery: when real GDP becomes positive after a period of negative GDP.
Boom: When the recovery passes the previous peak.
Sometimes called prosperity.

7. Expansion Expansion: period of recovery from a recession.
Trend line: a steady growth path.

8. Contractions typically GDP decreases The economy shrinks,
unemployment increases (cyclical)
reduced spending.
To ease impact of recession = government cut taxes

9. Expansions typically production increases
resources are being utilized.
GDP increases
unemployment decreases
inflationary pressure rises.

10. Causes of the Business Cycle Capital Expenditures
Expanding economy
businesses expect high sales in future
invest in new plants, machinery, etc.
Stop when they have enough
Layoffs begin
Start of recession

11. Causes of the Business Cycle Inventory Adjustments
First sign of trouble, cut back on inventories
Possible a self-fulfilling prophecy
First sign of recovery, build back up
Clearest after WWII

12. Causes of the Business Cycle
Innovation:
puts new products on the market
makes other products obsolete
businesses more efficient = costs go down, profits increase, business grows.
Imitators invest heavily to catch up, investment boom follows
Market stabilizes, boom ends

13. Causes of the Business Cycle monetary factors
Credit and loan policies of Federal Reserve System
Easy money policies = low interest rates, loans easy to get
Borrowing and lending slow down, economic activity declines.
2007 bubble burst

14. Causes of the Business Cycle external shocks
Increase in oil prices
Wars
International conflict
Some drive economy up
Others drive economy down