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

The Main Idea In a market economy, there is an economic cycle, which includes four stages: prosperity, recession, depression, and recovery. These are also the four stages of the business cycle. In the last few decades, we have experienced the economic cycle a number of times.

Key Concepts Guiding the Economy Four Stages of the Business Cycle

Key Terms the rise and fall of economic activity over time business cycle the peak of economic activity prosperity

Key Terms when economic activity slows down recession a deep recession that affects the entire economy and lasts for several years depression

Key Term a rise in business activity after a recession or depression recovery

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.

Graphic Organizer Guiding the Economy The Federal Reserve Regulates the amount of money in circulation Controls the amount of money loaned Controls interest rates State and local governments also take steps to influence their economies

Four Stages of the Business Cycle The business cycle of one country can affect other trading partners. business cycle the rise and fall of economic activity

Figure 3.1 Business Cycle Model

Prosperity Prosperity results from low unemployment, high production of goods and services, and the opening of new businesses. prosperity a peak of economic activity

Characteristics of Prosperity 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

Characteristics of a Recession 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

Characteristics of a Depression 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 Many banks around the country failed Unemployment rose nearly 800 percent The Great Depression Many towns and other civic bodies printed their own money The GDP fell nearly 50 percent The average manufacturing wage was 5 cents an hour The money supply fell by one-third

“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.”

Production starts to increase during a recovery. a rise in business activity after a recession or depression

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.

What is the stage that follows a recession or depression? The recovery stage can happen after either a recession or a depression.

What is the difference between a recession and a depression? A recession is a slight downturn; a depression is a major downturn.

Why may innovation play an important role in the recovery stage of a business cycle? Innovation creates demand that leads to more employment and production, which leads to more demand.

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