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.

Business cycles• Systematic

changes in real GDP marked by alternating periods of expansion and contraction.

• Or- the economy has highs and lows

Phases of the Business Cycle• 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

Phases of the Business Cycle• Recovery: when real GDP

becomes positive after a period of negative GDP.

• Expansion: period of recovery from a recession.

• Trend line: a steady growth path.

• Depression: a severe recession.

• Has large unemployment, acute shortages, excess capacity in manufacturing.

Phases of the Business Cycle• Contractions: typically GDP

decreases and cyclical unemployment increases

• The economy shrinks, unemployment increases, reduced spending.

• To ease impact of recession = government cut taxes

• Expansions: typically production increases and resources are being utilized.

• GDP increases, unemployment decreases, inflationary pressure rises.

Fiscal Policy• Fiscal Policy: The federal

government’s attempt to stabilize the economy through taxing and government spending

• Used in demand-side policies

• Designed to increase/decrease total demand by shifting the AD curve to the left/right

Keynesian Economics• Keynesian Economics = a set of

actions designed to lower unemployment by stimulating AD.

• Theories by John Keynes in 1936.• Said business sector most influence

on stability of economy• GDP = C + I + G + NX• C = big, but most stable• G = important, but over time

normally stable• NX = too small for influence• I = affects jobs, spending patterns,

allocation of resources, etc.

Factors

• Multiplier = a change in investment spending will have a magnified effect on total spending

• Accelerator = change in investment spending caused by a change in total spending.

• after decline begins, investment spending drops more.

• Results in downward spiral• Contributes to instability of GDP

Causes of the Business Cycle• Capital Expenditures:• Expanding economy

= businesses expect future sales to be high so they invest in new plants, machinery, etc.

• When they have enough, they stop buying, this causes layoffs, leads to a recession.

Causes of the Business Cycle• Inventory

Adjustments:• First sign of trouble,

some businesses cut back on inventories

• Possible a self-fulfilling prophecy

• First sign of recovery, build back up

• Clearest after WWII

Causes of the Business Cycle• Innovation and Imitation:• Innovation: puts new

products on the market• Innovation: makes other

products obsolete• Innovation: businesses more

efficient = costs go down, profits increase, business grows.

• Imitators invest heavily to catch up, investment boom follows

• Market stabilizes, boom ends

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

Causes of the Business Cycle• External Shocks:• Increase in oil prices• Wars• International

conflict• Some drive

economy up• Others drive

economy down

Government’s Role• Uses fiscal policy to manage

spending and taxing.• Responsible for implementing

fiscal policy• i.e. government would lower

taxes in expansionary fiscal policy

• Decrease taxes to combat long period of GDP

• To decrease inflation, gov. may cut programs, benefits

• i.e. cuts spending on NASA to help decrease inflation