1. 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

2. 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

3. 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 195410 months August 1957April 19588 months April 1960February 196110 months December 1969November 197011 months November 1973March 197516 months January 1980July 19806 months July 1981November 198216 months July 1990March 19918 months March 2001November 20018 months

4. 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?

5. 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?

6. 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?

7. 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?

8. 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?

9. 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 1870-190026 months 1900-195025 months19 months 1950-200161 months9 months The Business Cycle What Happens during a Business Cycle?

10. 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