Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 34 Long-Run Economic Growth Potential Real GDP Potential GDP Actual GDP

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 34 The Business Cycle Some Basic Business Cycle Definitions

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 34 Who Decides if the Economy Is in a Recession? Making the Connection PEAKTROUGH LENGTH OF RECESSION July 1953May months August 1957April months April 1960February months December 1969November months November 1973March months January 1980July months July 1981November months July 1990March months March 2001November months

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 34 Learning Objective 9.3 The Effect of the 2001 Recession on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate The Business Cycle What Happens during a Business Cycle?

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 34 The Effect of the Business Cycle on the Inflation Rate The Business Cycle What Happens during a Business Cycle?

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 34 The Effect of the Business Cycle on the Unemployment Rate The Business Cycle What Happens during a Business Cycle?

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 34 The Effect of the Business Cycle on the Unemployment Rate The Business Cycle What Happens during a Business Cycle?

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 34 FIGURE 9.12 Fluctuations in Real GDP, 1900–2006 Recessions Have Been Milder and the Economy Has Been More Stable Since 1950 The Business Cycle What Happens during a Business Cycle?

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 34 Recessions Have Been Milder and the Economy Has Been More Stable Since 1950 The Business Cycle Has Become Milder PERIOD AVERAGE LENGTH OF EXPANSIONS AVERAGE LENGTH OF RECESSIONS months months19 months months9 months The Business Cycle What Happens during a Business Cycle?

Chapter 9: Economic Growth, the Financial System, and Business Cycles © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 34 The increasing importance of services and the declining importance of goods. unemployment insurance and other government transfer programs that provide funds to the unemployed. Active federal government policies to stabilize the economy. The Business Cycle Why Is the Economy More Stable? BIG Government Automatic stabilizers