1. Economic Conditions Change
Chapter 2-2

2. Business Cycle
The movement of the economy from one condition to another and back is called the business cycle.

3. Prosperity
Prosperity – period in which people who want to work are working, businesses produce goods and services in record numbers, wages are good, and the rate of GDP growth increase.

4. Recession
Recession – period in which demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for two or more quarters of the calendar year.

5. Depression
Depression – a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures.
Great Depression (1930 – 1940) – 25% unemployment

6. Recovery
Recovery – the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again.
People gain employment and consumers regain confidence

7. Inflation Inflation in an increase in the general level of prices
The buying power of the dollar decreases
If prices increase, it takes more money to buy the same amount of goods and services
Inflation is most harmful to people living on a fixed income

8. Causes of Inflation
Demand for goods and services is greater that the supply
Even though wages tend to increase during inflation, prices of goods and services usually rise so fast that the wage earner never seems to catch up

9. Measuring Inflation
Consumer Price Index or CPI - a number that compares prices in one year with some earlier base year.
High inflation would be 10% to 12%
Mild inflation would be considered 2% to 3%
Mild inflation can stimulate the economy.
The prices of the products sold are high in relation to the cost of labor. The producers make higher profit and tend to then hire more employees who in return increase spending

10. Deflation Deflation is the opposite of inflation.
Deflation means the decrease in the general price levels
Usually happens in a period of recession or depression, so people have less money to spend

11. Interest Rate Interest is the cost of money
Supply and demand of money is a major influence on the level of interest rates
As amounts saved increase, interest rates tend to decline
This occurs because there are more funds available to lend out.
When borrowing by consumers, businesses, and government increases, interest rates are likely to rise