1. Unit 3: Macroeconomics
Lesson 2: Business Cycles

2. Definitions
business cycle: major fluctuations in economic activity that impact the GDP

3. Definitions Phases ● expansion: a period of steady growth
● peak: the height of economic expansion
● contraction: a period of decline
● trough: the “bottoming out” of economy

4. Definitions Characteristics of Contractions
● recession: GDP falls for two consecutive quarters or six straight months
● depression: an especially long and severe recession
● stagflation: a decline in GDP combined with a rise in price level

5. Influences on Business Cycle
Business Investment: business spending on capital goods (physical and human)
● high levels of investment promote expansion
● low levels of investment contribute to contraction

6. Influences on Business Cycle
2. Interest Rates: the cost of credit that financial institutions charge to customers
● low interest rates increase borrowing, which promotes expansion
● high interest rates decrease borrowing, which contributes to contraction

7. Influences on Business Cycle
3. Consumer Expectations: future expectations about the economy
● prosperous outlook increases spending and promotes expansion
● negative outlook decreases spending and contributes to contraction

8. Influences on Business Cycle
External Factors: global events that affect the economy’s aggregate supply can contribute to expansion or contraction

9. U.S. Real GDP Billions of Dollars U.S. Enters the Great War
FDR’s New Deal & Start of WWII
Stock Market Crash & Start of Depression
Billions of Dollars

10. Predicting Business Cycles
Leading Indictors: anticipate the direction of the economy, such as building permits
Coincident Indicators: change with economy and provide current status, such as personal income or sales volume
Lagging Indicators: change months after upturn or downturn and provide information related to duration, such as business incomes