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UNIT CECONOMIC FOUNDATIONS

AND FINANCING

5.01 Exemplify the stages in a business cycle.

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Phases of the business cycle

Business cycle: The movement of an economy through recurring phases.

Expansion

Recession

Depression

Trough

Recovery

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Expansion

• Prosperous economy• Low unemployment• Increase in output of goods and

services• High consumer spending• A good time for new businesses

to start up or existing businesses to expand

• Expansion continues until it reaches a peak, at which time a recession then begins.

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Recession• A period of economic slowdown

that lasts for at least six months• Reduction in workforce• Reduced consumer spending• Fewer goods and services being

produced• Plans for business expansion are

put on hold.• Businesses spend little money on

research and development.• Ends when the economy reaches

its trough

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Depression

• Period of prolonged recession• Does not always follow a

recession• Very high unemployment• Many businesses are forced to

shut down.• Very low consumer spending• Very little production of goods

and services• Widespread poverty is the result

of a depression.

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Trough

• Low point in the business cycle in which the economy transitions from recession to recovery

• Economy stops slowing down

• Indicates that a recovery is near

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Recovery

• A period of renewed economic growth following a recession or depression

• Economic expansion begins again.

• Business begins to increase.• Unemployed people begin to find

jobs.• Demand for goods and services

increases.

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Factors affecting business cycles

• Responses of businesses to current economic conditions

• Consumer outlook and the resulting behaviors

• External factors

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Responses of businesses to current economic conditions

• Expanding operations during periods of recovery or expansion– Investing in new properties– Purchasing new equipment– Increasing inventories– Hiring additional employees

• Limiting operations during periods of recession– Laying off workers– Decreasing inventories to match the

decreased demand for goods and services

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Consumer outlook and the resulting behaviors

• During a recession, consumers fear the loss of jobs and decreases in wages.– Loss of confidence in the economy– Reduction in consumer spending

• During a period of economic prosperity and recovery, consumers are optimistic.– Increased consumer spending for material

goods and luxury items– Increased production of goods (by

businesses) to meet consumer demand

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External factors affecting business cycles

• Political changes– People– Policies

• Seasonal, climatic, and weather changes– Holidays– Major weather events

or acts of nature

• International relations– Wars– International trade

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Government’s influence over business cycles

• Taxes may be raised when the government needs additional money to run programs.

• Businesses and consumers have less money to spend when they are paying higher taxes.

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Government’s influence over business cycles (cont.)

• In order to boost the economy, the government may cut taxes, reduce interest rates, or establish federally funded programs.

• The Federal Reserve can lower interest rates in order to encourage spending by businesses and consumers.

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Government’s influence over business cycles (cont.)

• If inflation becomes a problem, the government may increase interest rates in order to discourage consumers from buying on credit.

• State and local governments may initiate tax-free shopping days in order to increase consumer spending, thus giving a boost to the economy.