1. 1 UNIT C ECONOMIC FOUNDATIONS AND FINANCING 5.01 Exemplify the stages in a business cycle.

2. 2 Phases of the business cycle Business cycle: The movement of an economy through recurring phases. Expansion Recession Depression Trough Recovery

3. 3 Expansion Prosperous economy Low unemployment Increase in output of goods and services High consumer spending A good time for new businesses to start up or existing businesses to expand Expansion continues until it reaches a peak, at which time a recession then begins.

4. 4 Recession A period of economic slowdown that lasts for at least six months Reduction in workforce Reduced consumer spending Fewer goods and services being produced Plans for business expansion are put on hold. Businesses spend little money on research and development. Ends when the economy reaches its trough

5. 5 Depression Period of prolonged recession Does not always follow a recession Very high unemployment Many businesses are forced to shut down. Very low consumer spending Very little production of goods and services Widespread poverty is the result of a depression.

6. 6 Trough Low point in the business cycle in which the economy transitions from recession to recovery Economy stops slowing down Indicates that a recovery is near

7. 7 Recovery A period of renewed economic growth following a recession or depression Economic expansion begins again. Business begins to increase. Unemployed people begin to find jobs. Demand for goods and services increases.

8. 8 Factors affecting business cycles Responses of businesses to current economic conditions Consumer outlook and the resulting behaviors External factors

9. 9 Responses of businesses to current economic conditions Expanding operations during periods of recovery or expansion –Investing in new properties –Purchasing new equipment –Increasing inventories –Hiring additional employees Limiting operations during periods of recession –Laying off workers –Decreasing inventories to match the decreased demand for goods and services

10. 10 Consumer outlook and the resulting behaviors During a recession, consumers fear the loss of jobs and decreases in wages. –Loss of confidence in the economy –Reduction in consumer spending During a period of economic prosperity and recovery, consumers are optimistic. –Increased consumer spending for material goods and luxury items –Increased production of goods (by businesses) to meet consumer demand

11. 11 External factors affecting business cycles Political changes –People –Policies Seasonal, climatic, and weather changes –Holidays –Major weather events or acts of nature International relations –Wars –International trade

12. 12 Government’s influence over business cycles Taxes may be raised when the government needs additional money to run programs. Businesses and consumers have less money to spend when they are paying higher taxes.

13. 13 Government’s influence over business cycles (cont.) In order to boost the economy, the government may cut taxes, reduce interest rates, or establish federally funded programs. The Federal Reserve can lower interest rates in order to encourage spending by businesses and consumers.

14. 14 Government’s influence over business cycles (cont.) If inflation becomes a problem, the government may increase interest rates in order to discourage consumers from buying on credit. State and local governments may initiate tax-free shopping days in order to increase consumer spending, thus giving a boost to the economy.