Reading the Business Cycle

Fill in the blanks What goes up, must come _______. Too much of a good thing, is a _____ thing. Life has its ups , and ________. All good things come to an ___________.

Real GDP is at its highest point of the business cycle. The lowest point of real GDP reached during the business cycle is known as the trough. If the trough is particularly deep, it may be called a depression. A depression is an economic situation where the level of output falls to especially low levels and unemployment climbs to very high levels relative to the historical average. Real output in the economy is decreasing, and the unemployment rate is rising. As the contraction continues, inflationary pressures subside. If the recession continues long enough, prices may actually start to fall, a situation known as deflation. Peak Contractionary Expansionary Real GDP is at its highest point of the business cycle. Expansionary Long-run trend of real GDP Real output in the economy is increasing and the unemployment rate is declining. As the economic expansion continues, inflation may begin to accelerate. Trough

Long-run trend of real GDP - Inflation - Interest rates are high - Low unemployment 4% Peak Contractionary Expansionary Expansionary Long-run trend of real GDP Trough A recession occurs when real GDP falls for two consecutive quarters. - Deflation - Interest rates are low - High unemployment +6%

Expansionary AS A minimum wage increase or tax cut can shift aggregate demand to the right causing demand for all goods to increase, and may lead to inflation. P1 P Price Level AD1 AD Q Q1 Real GDP

Contractionary AS A tax increase or less government spending can shift the demand curve to the left causing demand for all goods to decrease and may lead to a recession. P Price Level P1 AD1 AD Q1 Q Real GDP

Contraction/Expansion of the Business Cycle Drop in business spending High unemployment (6 - 10% in recession) Interest rates go from high to low Consumer confidence Saving for a rainy day Deflation may occur Expansion Business investments increase Interest rates go from low to high Consumer confidence increases Low unemployment Inflation may rise

You are in an economy that depends on sales of consumer goods You are in an economy that depends on sales of consumer goods. Consumer spending is leading to economic expansion. Consumers are buying houses, cars, and electronic goods. These purchases are creating new jobs for workers in these industries.

The following occupations should stand Autoworkers Home builders Airplane workers Computer software designers

The following occupations should stand Clothing sales workers Restaurant workers Hair Stylists Electronic entertainment sales workers As people’s incomes increase they become interested in more purchases of things such as clothing, meals in restaurants, and entertainment.

Consumer spending is beginning to decline!! Consumers choose to spend less on clothing, meals in restaurants, and entertainment…… Clothing sales workers Restaurant workers Hair Stylists Electronic entertainment sales workers

Consumer spending continues to decline!! Consumers and businesses choose to spend less on cars, houses, airplanes, and computer equipment…… Autoworkers Home builders Airplane workers Computer software designers