2-2 Economic Conditions Change
Objectives:
– Describe the four phases of the business cycle
– Explain causes of inflation and deflation
– Identify the importance of interest rates
Essential Question:
– What causes the phases of the business cycle
to change?
The Business Cycle
Roller Coaster
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.
Economic Cycle
United States history has had patterns of good
times to bad times back to good times.
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
Business Cycle
The business cycle has four parts:
Prosperity
Recession
Depression
Recovery
Figure 3.1 Business Cycle Model
Four Stages of the Business Cycle
Prosperity is at the peak of
the business cycle
Demand for goods and
services is very high..
Unfortunately, it cools
down and activity slows
down
prosperity
a peak of economic
activity
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
Four Stages of the Business Cycle
Recession is when the
economy slows down.
May not be too serious or
too long, but signals
trouble for some people’s
jobs.
Ripple Effect-drop in
related business. Ex –
home builder
recession
when economic activity
slows down
Recession
A recession in one industry can cause a ripple
effect throughout the entire economy.
Graphic Organizer
Characteristics of a Recession
Businesses produce less which means they
need less workers 
Unemployment increases
People have less money to spend
Fewer goods and services are produced
The GDP declines
Depression
If a recession
deepens and spreads
throughout the entire
economy, a nation
may move into a
depression.
depression
A phase marked by a
prolonged period of high
unemployment, weak
consumer sales, and
business failures.
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.
Great Depression Video
Great Depression Video
Video
Two partner groups
Get with a partner
In your most creative way possible, using
construction paper, markers, color pencils
and anything around the room –
Make a diagram of the Business Cycle
Graphic Organizer
Unemployment
rose nearly
800 percent
Many banks
around the
country
failed
The
Many towns
The GDP fell
Great
and other civic
nearly 50
Depression
bodies printed
percent
their own
The average
The money
money
manufacturing
supply fell
wage was 5
by one-third
cents an
hour
Recovery
Economic downturn
doesn’t go on forever.
Gradual process
Production starts to
increase during a
recovery.
recovery
a rise in business activity
after a recession or
depression
Recovery
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 things were produced?
Consumer Prices
Inflation
– The buying power of the dollar decreases
– If prices increased 5% during the last year,
items that cost $100 then would now cost $105.
– Ex: “Back when I was a kid…..a candy bar was
45 cents!”
Rate of Inflation
With inflation,
one’s buying power
decreases.
inflation
An increase in the general
level of prices.
Rate of Inflation
Causes of Inflation
When demand is greater than supply
War
Increase in the price of raw materials
Increase in expenses
Increase in salaries
Too much money circulating in the economy
Measuring Inflation
In the US, one of the
most watched
measures of
inflation is called
the Consumer Price
Index (CPI)
Price index
a number that compares
prices in one year with
some earlier base year.
Consumer Price Index (CPI)
CPI – “a measure of the average change
over time in the prices paid by urban
consumers for a market basket of consumer
goods and services” - Bureau of Labor and
Statistics
Consumer Price Index
Activity
Go to www.bls.gov
Complete handout, by yourself
Rate of Inflation
Deflation can occur
when the supply of
goods is greater than
the demand.
deflation
a general decrease in
the price of goods and
services
Graphic Organizer
Deflation
Economy produces more goods than people want.
Sellers lower prices.
Sellers cut production.
People have less money to buy goods.
Demand continues to go down.
Interest Rates
Interest rates represent the “cost of money”
– the cost to borrow money
Have a strong influence on business
activities
Higher interest rates = higher business costs
Types of Interest Rates
Prime rate – the rate banks make available
to their best business customers ex – large
corporations
Discount rate – the rate financial institutions
are charged to borrow funds from the Fed
T-bill rate – is the yield (money you make)
on short term (13 week) U.S. government
bonds
Types of Interest Rates (cont’d)
Treasury bond rate – yield on long term (20
year) U.S. government debt obligations
Mortgage rate – the amount individuals pay
to borrow for the purchase of a new home
Corporate bond rate – the cost of borrowing
for large U.S corporations.
Certificate of Deposit (CD) – the rate for sixmonth time deposits at savings institutions
1. What is the stage that follows a recession or
depression?
The recovery stage can happen after either a
recession or a depression.
2. What is the difference between a recession
and a depression?
A recession is a slight downturn; a depression
is a major downturn.
3. 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.
Section 2-3. Other measures of Business Activity
Objectives
Discuss investment activities that promote
economic growth
Explain borrowing activities by government.
Businesses and consumers
Describe future concerns of economic
growth
Essential Question – how does the
government borrow money?
Investment Activities
Investing can happen in numerous ways:
– You are investing in your future right now by
being in school
– Companies invest all the time by buying
buildings and equipment
Capital Spending
Capital Spending
refers to money
spent by a business
for an item that will
be used over a long
period.
Capital projects
Involve spending by
businesses for items such
as land, buildings and
equipment and new
products.
Where does the moola come from for all
these capital projects!???!?
Personal Savings
Stock investments
Bonds
Personal savings….not much else to
explain
The Stock Market
-Corporations are a
major type of
business org.
-Businesses can’t
come up with all the
money on their own
so people invest in
them
Stock
Represents ownership in a
corporation
David Choe – graffiti artist
Multi-millionaire overnight!
Was given the choice for a couple thousand
dollars or stock to spray paint the walls of
Facebook’s office.
He chose stock – now worth $250,000,000!
Video
What causes the value of stocks to change?
Affected by many factors, but the main one
is SUPPLY and DEMAND
– If a company has higher earnings, more people
will DEMAND it’s stock and want to buy it
– Causes the value of stock to increase
Stock Market Activity
Go to www.yahoofinance.com
The Bond Market
Another investment
activity involves the
sales of bonds.
If you purchase a
bond, you are a
creditor…it means
you lent money to
the organization
bond
A bond represents debt for
an organization.
Government Debt
If a surplus exists,
government may
reduce taxes or
increase spending on
various programs
Budget surplus
When the government
spends LESS than it takes
in.
Government Debt
Budget deficit
When the government
spends MORE than it
takes in.
This happens more often
Government Debt
National debt
The total amount owed by
the federal government
www.usdebtclock.org