Chapter 3 Economic Activity in a Changing World Section 3.2 The Business Cycle

Read to Learn Describe the four stages of the business cycle. Explain how individuals and government influence the economy.

Key Concepts Guiding the Economy Four Stages of the Business Cycle

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 Economy The 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 cycle the rise and fall of economic activity The business cycle of one country can affect other trading partners.

Business Cycle Model Figure 3.1

Prosperity Prosperity results from low unemployment, high production of goods and services, and the opening of new businesses. prosperity a 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. recession when 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. depression a 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 The Great Depression The GDP fell nearly 50 percent Unemployment rose nearly 800 percent The average manufacturing wage was 5 cents an hour Many banks around the country failed The money supply fell by one-third Many towns and 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. recovery a rise in business activity after a recession or depression

Recovery 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

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?

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

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

Chapter 3 Economic Activity in a Changing World Section 3.2 The Business Cycle End of