1. 2-2 Economic Conditions Change
Objectives:
Describe the four phases of the business cycle
Explain causes of inflation and deflation
Identify the importance of interest rates
Essential Question:
What causes the phases of the business cycle to change?

2. The Business Cycle
Roller Coaster

3. The Main Idea
In 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.

4. Economic Cycle
United States history has had patterns of good times to bad times back to good times.

5. Four Stages of the Business Cycle
The business cycle of one country can affect other trading partners.
business cycle
the rise and fall of economic activity

6. Business Cycle
The business cycle has four parts:
Prosperity
Recession
Depression
Recovery

7. Figure 3.1
Business Cycle Model

8. Four Stages of the Business Cycle
Prosperity is at the peak of the business cycle
Demand for goods and services is very high..
Unfortunately, it cools down and activity slows down
prosperity
a peak of economic activity

9. Characteristics of Prosperity
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

10. Four Stages of the Business Cycle
Recession is when the economy slows down.
May not be too serious or too long, but signals trouble for some people’s jobs.
Ripple Effect-drop in related business. Ex – home builder
recession
when economic activity slows down

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

12. Characteristics of a Recession
Graphic Organizer
Characteristics of a Recession
Businesses produce less which means they need less workers 
Unemployment increases
People have less money to spend
Fewer goods and services are produced
The GDP declines

13. Depression
If a recession deepens and spreads throughout the entire economy, a nation may move into a depression.
depression
A phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures.

14. Characteristics of a Depression
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

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

16. Two partner groups
Get with a partner
In your most creative way possible, using construction paper, markers, color pencils and anything around the room –
Make a diagram of the Business Cycle

17. Graphic Organizer Many banks around the country failed
Unemployment rose nearly 800 percent
The Great Depression
Many towns
and other civic bodies printed their own money
The GDP fell nearly 50 percent
The average manufacturing wage was 5 cents an hour
The money supply fell by one-third

18. Economic downturn doesn’t go on forever.
Recovery
Economic downturn doesn’t go on forever.
Gradual process
Production starts to increase during a recovery.
recovery
a rise in business activity after a recession or depression

19. Characteristics 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

20. 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.
What things were produced?

21. Consumer Prices Inflation The buying power of the dollar decreases
If prices increased 5% during the last year, items that cost $100 then would now cost $105.
Ex: “Back when I was a kid…..a candy bar was 45 cents!”

22. With inflation, one’s buying power decreases.
Rate of Inflation
With inflation, one’s buying power decreases.
inflation
An increase in the general level of prices.

23. Rate of Inflation When demand is greater than supply War
Causes of Inflation
When demand is greater than supply
War
Increase in the price of raw materials
Increase in expenses
Increase in salaries
Too much money circulating in the economy

24. Measuring Inflation
In the US, one of the most watched measures of inflation is called the Consumer Price Index (CPI)
Price index
a number that compares prices in one year with some earlier base year.

25. Consumer Price Index (CPI)
CPI – “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services” - Bureau of Labor and Statistics
Consumer Price Index

26. Activity
Go to
Complete handout, by yourself

27. Rate of Inflation
Deflation can occur when the supply of goods is greater than the demand.
deflation
a general decrease in
the price of goods and services

28. Graphic Organizer Deflation
Economy produces more goods than people want.
Sellers lower prices.
Sellers cut production.
People have less money to buy goods.
Demand continues to go down.

29. Interest Rates
Interest rates represent the “cost of money” – the cost to borrow money
Have a strong influence on business activities
Higher interest rates = higher business costs

30. Types of Interest Rates
Prime rate – the rate banks make available to their best business customers ex – large corporations
Discount rate – the rate financial institutions are charged to borrow funds from the Fed
T-bill rate – is the yield (money you make) on short term (13 week) U.S. government bonds

31. Types of Interest Rates (cont’d)
Treasury bond rate – yield on long term (20 year) U.S. government debt obligations
Mortgage rate – the amount individuals pay to borrow for the purchase of a new home
Corporate bond rate – the cost of borrowing for large U.S corporations.
Certificate of Deposit (CD) – the rate for six-month time deposits at savings institutions

32. What is the stage that follows a recession or depression?
The recovery stage can happen after either a recession or a depression.

33. What is the difference between a recession and a depression?
A recession is a slight downturn; a depression is a major downturn.

34. 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.

35. Section 2-3. Other measures of Business Activity

36. Objectives
Discuss investment activities that promote economic growth
Explain borrowing activities by government. Businesses and consumers
Describe future concerns of economic growth
Essential Question – how does the government borrow money?

37. Investment Activities
Investing can happen in numerous ways:
You are investing in your future right now by being in school
Companies invest all the time by buying buildings and equipment

38. Capital Spending
Capital Spending refers to money spent by a business for an item that will be used over a long period.
Capital projects
Involve spending by businesses for items such as land, buildings and equipment and new products.

39. Where does the moola come from for all these capital projects!???!?
Personal Savings
Stock investments
Bonds

40. Personal savings….not much else to explain

41. -Corporations are a major type of business org.
The Stock Market
-Corporations are a major type of business org.
-Businesses can’t come up with all the money on their own so people invest in them
Stock
Represents ownership in a corporation

42. David Choe – graffiti artist
Multi-millionaire overnight!
Was given the choice for a couple thousand dollars or stock to spray paint the walls of Facebook’s office.
He chose stock – now worth $250,000,000!
Video

43. What causes the value of stocks to change?
Affected by many factors, but the main one is SUPPLY and DEMAND
If a company has higher earnings, more people will DEMAND it’s stock and want to buy it
Causes the value of stock to increase

44. Stock Market Activity
Go to

45. Another investment activity involves the sales of bonds.
The Bond Market
Another investment activity involves the sales of bonds.
If you purchase a bond, you are a creditor…it means you lent money to the organization
bond
A bond represents debt for an organization.

46. Government Debt
If a surplus exists, government may reduce taxes or increase spending on various programs
Budget surplus
When the government spends LESS than it takes in.

47. Government Debt Budget deficit
When the government spends MORE than it takes in.
This happens more often

48. Government Debt National debt
The total amount owed by the federal government