1. Long-Run Economic Growth Potential Real GDP Potential GDP Actual GDP

2. The Business Cycle Some Basic Business Cycle Definitions

3. 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 December 2007 May 2009 17 months How Do We Know When the Economy Is in a Recession? The Business Cycle The U.S Business Cycle

4. The Effect of Recessions on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate What Happens during the Business Cycle? Toward the end of a typical expansion, the inflation rate begins to rise. Recessions cause the inflation rate to fall. By the end of a recession, the inflation rate is significantly below what it had been at the beginning of the recession.

5. How Recessions Affect the Unemployment Rate The Effect of the Business Cycle on the Unemployment Rate What Happens during the Business Cycle? Unemployment rises during recessions and falls during expansions. The reluctance of firms to hire new employees during the early stages of a recovery means that the unemployment rate usually continues to rise even after the recession has ended.

6. Is the “Great Moderation” Over? What Happens during the Business Cycle? Fluctuations in Real GDP, 1900– 2008 Fluctuations in real GDP were greater before 1950 than they have been since 1950.

7. Until 2007, the Business Cycle Had Become Milder PERIOD AVERAGE LENGTH OF EXPANSIONS AVERAGE LENGTH OF RECESSIONS 1870-190026 months 1900-195025 months19 months 1950-200961 months10 months What Happens during the Business Cycle? Is the “Great Moderation” Over?

8. 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