Economic Instability

Business Cycle Systematic ups and downs of real GDP Phases Recession Recovery/Expansion

Real GDP Real GDP looks at GDP without any inflation Shows what GDP would be if prices had not changed

Recession Recession = Real GDP declines 6 consecutive months Begins when economy reaches peak Peak = where real GDP stops going up Ends when economy reaches a trough Trough = when real GDP stops going down

Recovery/Expansion Expansion = a period of recovery from a recession Continues until the economy reaches a new peak

Trend Line Trend line = steady growth path the economy would follow if there weren’t recessions or recoveries/expansions

Business Cycle

Depression Can occur if recession becomes too severe Characteristics Large unemployment Acute shortages Excess capacity in manufacturing plants

Causes of Business Cycle Capital Expenditures Inventory Adjustments Innovation and Imitation Monetary Factors External Shocks

Stagflation Slow or stagnant economic growth Relatively high inflation Relatively high unemployment What is wrong with this picture?