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

3. 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.

4. Key Concepts
Guiding the Economy
Four Stages of the Business Cycle

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

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

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

8. Guiding the Economy
Congress and the President enact laws that impact fiscal policy.
Government expenditures are often planned to guide the economy.

9. Guiding the Economy
The Federal Reserve (“the Fed”) is a government agency that guides the economy.

10. 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

11. 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

12. Figure 3.1
Business Cycle Model

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

14. 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

15. Recession
During a recession, businesses produce less, so they need fewer workers.
recession
when economic activity slows down

16. 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

17. Recession
A recession in one industry can cause a ripple effect throughout the entire economy.

18. Depression
A depression can be limited to one country but usually spreads to related countries.
depression
a deep recession

19. 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

20. Depression
The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression.

21. 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

22. “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.”

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

24. 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

25. 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.

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

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

28. 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.

29. End of