The Business Cycle

The United States’ GDP is not constant from year to year. Instead, the GDP_________________ most years GROWS and then SHRINKS in some years. The ups and downs in GDP over time is referred to as the business cycle.

The Business Cycle The business cycle consists of 4 phases: 1. Recovery (or Expansion) 2. Peak 3. Recession 4. Trough.

Draw and fully label the graph of the business cycle (Don’t forget the axes)

GDP and the phases of the business cycle GDP during recovery – During the recovery phase GDP is… – increasing. – That means we are producing more goods and services than before. GDP during a peak – During the peak phase, GDP has temporarily – maxed out. – It is high, but it is no longer increasing.

GDP and the phases of the business cycle GDP during a recession – During the recession phase, GDP is – decreasing. – That means that we are producing fewer goods and services than before. GDP during a trough – During the trough phase, GDP has temporarily bottomed out. – It is low, but it is no longer decreasing

Unemployment, Inflation, and the phases of the business cycle Even though the businesses cycle only measures one economic indicator, GDP, these changes in GDP have predictable effects on the other two key economic indicators as well the unemployment rate and the inflation rate.

Expansion / Recovery and The Unemployment Rate During the Expansion / Recovery phase GDP is growing or not growing? Growing. To produce more goods and services, do businesses need to hire more workers, or fewer workers? More Workers So will the Unemployment rate be growing or shrinking during the expansion / recovery phase? Shrinking

Expansion / Recovery and The Inflation Rate Since more people are working, will they be buying more goods and services than before, or fewer goods and services? More goods and services When business owners see more and more people buying their goods and services, what will they do to their prices? Will they raise them or lower them? Raise them. So will the inflation rate (the rate at which prices are rising) be growing or shrinking during the expansion / recovery phase? Growing

To sum up… During the expansion / recovery phase of the business cycle, the unemployment rate is… Shrinking and the Inflation rate is… Growing

Peak and the Unemployment and Interest Rates During the Peak phase of the business cycle, GDP is high. We are making many goods and services And since we need many workers to make them, the unemployment rate will be high or low? Low Since many people are working, making money, and buying goods and services, Will business keep their prices high or low? High So the inflation rate will be high or low? High So to sum up, during the peak phase, the unemployment rate is… low and the Inflation rate is… High

Recession and the Unemployment and Interest Rates During the Recession phase of the business cycle, GDP is shrinking. We are making fewer goods and services So the unemployment rate will be growing or shrinking? Growing Since fewer people are working, making money, and buying goods and services, Will business still be able to raise their prices in order to sell things? No So the inflation rate will be growing or shrinking? shrinking So to sum up, during the recession phase, the unemployment is… growing and the Inflation rate is… shrinking

Trough and the Unemployment and Interest Rates During the Trough phase of the business cycle, GDP is low. We are making few goods and services So the unemployment rate will be high or low? High Since few people are working, making money, and buying goods and services, the inflation rate will be high or low? Low So to sum up, during the trough phase, the unemployment rate is… high and the Inflation rate is… low

The Business Cycle Illustrated: Important note The various phases of the business cycle last for different amounts of time. In recent history, expansions have lasted years… longer than have recessions. The most notable example of a long recession/trough is… The Great Depression