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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