Chapter 3EconomicActivity in aChanging WorldSection 3.2The BusinessCycle

Read to LearnDescribe the four stages of the business cycle.

Explain how individuals and government influence the economy.

The Main IdeaIn a market economy, there is an economic cycle, which includes four stages: prosperity, recession, depression, and recovery. These are also the four stages of the business cycle. In the last few decades, we have experienced the economic cycle a number of times.

Key ConceptsGuiding the Economy

Four Stages of the Business Cycle

Key Terms

business cycle

prosperity

the rise and fall of economic activity over time

the peak of economicactivity

Key Terms

recession

depression

when economic activityslows down

a deep recession that affects the entire economy and lasts for several years

Key Term

recovery a rise in business activity after a recession or depression

Guiding the Economy

Congress and the President enact laws that impact fiscal policy.

Government expenditures are often planned to guide the economy.

Guiding the Economy

The Federal Reserve (“the Fed”) is a government agency that guides the economy.

Guiding the EconomyThe Federal Reserve

Regulates the amount of money in circulation

Controls interest rates

Controls the amount of

money loaned

State and local governments also take steps to influence their economies

Graphic Organizer

Four Stages of the Business Cycle

business cyclethe rise and fall of economic activity

The business cycle of one country can affect other trading partners.

Business Cycle ModelFigure 3.1

Prosperity

Prosperity results from low unemployment, high production of goods and services, and the opening of new businesses.

prosperitya peak of economic activity

Graphic Organizer

Characteristics of Prosperity

Higher wages

Greater demand for goods to be produced

More people buy houses, which creates work for builders

People buy more goods from other countries, which benefits those countries

Recession

During a recession, businesses produce less, so they need fewer workers.

recessionwhen economic activity slows down

Graphic Organizer

Characteristics of a Recession

Businesses produce less

Unemployment increases

People have less money to spend

Fewer goods and services are produced

The GDP declines

Recession

A recession in one industry can cause a ripple effect throughout the entire economy.

Depression

A depression can be limited to one country but usually spreads to related countries.

depressiona deep recession

Graphic Organizer

Characteristics of a Depression

High unemployment

Low production of goods and services

Can last for several years

Spreads to other countries

High number of unused manufacturing facilities

Very rare

Depression

The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression.

Graphic Organizer

TheGreat

DepressionThe GDP fell

nearly 50percent

Unemploymentrose nearly800 percent

The averagemanufacturingwage was 5

cents an hour

Many banksaround the

countryfailed

The moneysupply fell

by one-third

Many townsand other civic bodies printed

their own money

“Depressionproof”

During the Great Depression, millions of people lost their homes and livelihoods.

A large percentage of middle-class Americans were able to keep their jobs. These people were in professions considered “depressionproof.”

Recovery

Production starts to increase during a recovery.

recoverya rise in business activity after a recession or depression

RecoveryCharacteristics of a Recovery

People start going back to work

People have money to purchase goods and services

Demand for goods and services stimulates more production

New businesses open

Businesses become more innovative

Recovery

In 1939, the United States was beginning to recover from the depression when World War II began.

The war increased the rate of recovery because of the demand for production.

1. What is the stage that follows a recession or depression?

The recovery stage can happen after either a recession or a depression.

2. What is the difference between a recession and a depression?

A recession is a slight downturn; a depression is a major downturn.

3. Why may innovation play an important role in the recovery stage of a business cycle?

Innovation creates demand that leads to more employment and production, which leads to more demand.

Chapter 3EconomicActivity in aChanging WorldSection 3.2The BusinessCycle

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