Business Cycle
Changes in Business Activity
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Economics Unit 7, Lesson 2
Learning Targets
1. Describe phases of business cycle
2. Identify and explain the factors that
cause business cycles
3. Analyze how economists use
business cycle theory to predict what
is going to happen
4. Analyze how the government uses
predictions to make public policy
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Business Cycle Theory
A free market economy does not grow at a constant rate. It
goes through a series of expansions and contractions.
These fluctuations are called business cycles. Business
cycles are a pattern to the general level of economic activity
or the level of production of goods and services (GDP).
Since this is a pattern it keeps repeating itself.You can see
the business cycle activity from 1914 to 1992 below in the
graph.
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Business Cycle Theory
Four Phases of business
cycle are:
–Expansion
–Peak
–Contraction-recession
–Trough
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Contraction or Recession
For a contraction to be a true
recession, you must see 2
consecutive quarters or six
months of declining real
GDP.
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Business Cycle Theory
Peak
Stages
Expansion
Trough
Recession
Expansion Phase
1.
2.
3.
4.
5.
6.
7.
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GDP
Durable goods
Factory order
Raw materials orders
Unemployment
Consumer confidence
problem -inflation
Contraction or Recession
1. Demand
2. GDP
3. Durable goods
4. Factory orders
5. Unemployment
6.Consumer confidence
7. problem- unemployment.
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Causes
• There are several things that may
lead to fluctuations in the
economy. Some are within the
economy and we call them
internal factors. Some are
outside the economy and we call
them external factors.
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Internal factors (within the
economic system)
1. Business Investment
In an expanding economy firms
invest in new capital goods. This
investment spending creates new
jobs and growth. If firms decide to
halt investment, this slows the
economy down and can cause
unemployment.
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2. Interest Rates and Credit
When interest rates go up, consumers
will not make big ticket purchases.
Lower demand slows down economy.
When interest rates go down we see
more purchases being made – causing
growth.
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3. Consumer Expectations
Fears of the economy slowing down can
cause consumers to stop spending. This
will then actually slow down the
economy.
If consumers feel confident about the
economy, they spend more. Spending
more can cause growth.
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External factors (outside the
economic system)
External Shocks
These are factors outside the economic
system, but they can cause fluctuations in
business activities. Examples include:
wars
natural disasters
foreign economies
9/11
© 2012, TESCCC