2. 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.

3. Business cycles Systematic changes in real GDP marked by alternating periods of expansion and contraction. Or- the economy has highs and lows

4. 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

5. 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.

6. 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.

7. 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

8. 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.

9. 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

10. 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.

11. 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

12. 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

13. 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

14. Causes of the Business Cycle External Shocks: Increase in oil prices Wars International conflict Some drive economy up Others drive economy down

15. 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