Economic InstabilityMacroeconomics Principles

Business Cycles• Cycle: Systematic ups and downs of GDP• Natural• Inevitable• Necessary?• Phases

– Recession: 2+ quarters of GDP decline– Expansion: GDP increase

• Points– Peak: Point where real GDP stops going up– Trough: Point where real GDP stops going down

• Depression: steep fall in GDP, high unemployment, over a year in length

Expansion ExpansionRecession

The Phases of the Business Cycle

Boom

Secular growth trend

DownturnUptu

rn

Trough

Peak

0Jan.-Mar

Tota

l Out

put

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

GDP FALLINGINFLATION FALLINGUNEMPLOYMENT RISING

GDP RISINGINFLATION RISINGUNEMPLOYMENT FALLING

Note: Shaded areas indicate recessions.

Real GDP 1958-2007, in 2000 dollars• Note: “Years” is on horizontal axis and “real GDP”

is on vertical axis.• General trend of economic growth• Recession years are shaded blue: note downward

slope on graph indicating that GDP is decreasing.

Post-World War II Recessions*

*The February 1945–October 1945 recession began before the war ended in August 1945.

Note: These recessions were of varying duration and severity.

Another Look at Expansions and Recessions

Can you find a pattern? Neither can economists! That’s why recessions are hard to predict.

Causes of Business Cycles• Changes in C, G, I, or X• Fiscal Policy• Monetary Policy • Shocks

• War– 9/11 Attacks

• Oil supply and prices– 1973 Arab oil embargo

• Bubbles– 1924-1929 Stock Market – 1997-2000 Dot-com Bubble– 2005-2009 Housing Bubble

THE PHASES OF BUBBLE INVESTING

FEARGREEDCONFIDENCEEXUBERANCEPANIC

EOCT Question

• Over a two-year period, the nation of Parthia experiences a decline in unemployment rate, a rise in real GDP, and a stabilized price level. Parthia appears to be

• A. At the start of a recession• B. In the middle of a depression• C. Stagnating economically• D. In the middle of a boom period