Complete set of notes on Chapter 12, Section 2. Dealing with Business Cycles. Notes cover two days of lecture.

1. BELL RINGER 04.29.2015
Write complete question and answer on your Bell Ringer form.
When do people
mean when they use
the phrase “roller
coaster experience”?

2. ECONOMICS
April 29, 2015
Chapter 12: Gross Domestic Product
and Growth
Section 12.2: Business Cycles

3. PHASES OF A BUSINESS CYCLE
In short, a business cycle has an up (period
of expansion) followed by a down (period of
contraction).
Usually, a business cycle is referring to
macroeconomics, or the “big picture” of a
nation’s economy.
12.2

4. PHASES OF A BUSINESS CYCLE
Four phases of a business cycle:
expansion — measured by real GDP
peak — point at which real GDP stops
rising
contraction — economic decline
trough — where the economy bottoms
out
12.2

5. PHASES OF A BUSINESS CYCLE
During contraction, GDP is always falling,
but other conditions may rise or fall,
creating different types of economic
instability:
recession — when real GDP falls for 6
straight months; can last 6-18 months;
marked by rising unemployment (6-
10%).
12.2

6. PHASES OF A BUSINESS CYCLE
During contraction, GDP is always falling,
but other conditions may rise or fall,
creating different types of economic
instability:
depression — longer, depressed output;
usually features high unemployment
12.2

7. PHASES OF A BUSINESS CYCLE
During contraction, GDP is always falling,
but other conditions may rise or fall,
creating different types of economic
instability:
stagflation — “stagnant inflation”; decline
in real GDP combined with a rising price
level.
12.2

8. PHASES OF A BUSINESS CYCLE
While economists can identify economic
cycles, they cannot predict how a cycle will
behave or how long it will last.
12.2

9. WHAT KEEPS A BUSINESS CYCLE
GOING?
Business investment helps keep economic
expansion going, but cutting back on
investment causes aggregate demand to
fall.
Low interest rates increase borrowing
which increases spending. High interest
rates can cut spending, which can lead to a
recession.
12.2

10. WHAT KEEPS A BUSINESS CYCLE
GOING?
Consumer expectations is reflected in their
spending.
External shocks (ex. drought or perfect
growing season, outbreak of war, oil spills)
can suddenly and dramatically affect
aggregate supply.
12.2

11. BUSINESS CYCLE FORECASTING
Economists use a set of variables called
leading indicators to try to forecast what the
economy will do in the future.
Stock prices, interest rates, and new orders
for capital goods are among those
indicators.
12.2

12. CHECK QUESTION 12.2A
Write complete question and answer on your Bell Ringer form.
Why are consumer expectations so
important to an economy’s
performance?

13. BELL RINGER 04.30.2015
Write complete question and answer on your Bell Ringer form.
What are some
indicators you may
have the flu?
If you have the flu,
whose advise would
you follow, the family
doctor’s or Great
Aunt Emma’s?

14. BUSINESS CYCLES IN AMERICAN
HISTORY
The Great Depression (Hoover and FDR)
Between 1929 and 1933, GDP fell by
1/3 and unemployment rose to 25%.
John Maynard Keynes, The General
Theory of Employment, Interest, and
Money
12.2

15. BUSINESS CYCLES IN AMERICAN
HISTORY
The Great Depression (Hoover and FDR)
FDR created Works Progress
Administration and Civilian
Conservation Corps to help people
get back to work.
Complete recovery did not occur until
1941 when the US entered WWII.
12.2

16. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 1970s-1980s (Carter)
OPEC launched oil embargo against
US and raised prices 400%.
This caused stagnation in US
markets.
12.2

17. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 1970s-1980s (Carter)
Americans responded by exercising
conservation in lifestyle, creating
more fuel-efficient cars, and
developing more of their own energy
resources.
Once US emerged as more self-
sufficient, OPEC responded by
lowering its prices.
12.2

18. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 1970s-1980s (Carter)
High interest rates caused real GDP
to fall and unemployment rose to over
9%.
12.2

19. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 2001 and 9/11 (G.W. Bush)
Throughout the Clinton presidency,
GDP reflected record growth, some
supported artificially by the
government.
Bush cut some programs that were
keeping some energy companies up.
12.2

20. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 2001 and 9/11 (G.W. Bush)
Collapse of Enron in 2001, beginning
in June, caused a shock to energy
market (its stock went from $90 to
61¢/share in 5 months).
This shock spread to hedge fund
accounts and money market funds.
12.2

21. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 2001 and 9/11 (G.W. Bush)
The terrorist attacks of 9/11 created
external shocks for the airline
industries and the stock market.
US economy fell into a recession
again.
12.2

22. BUSINESS CYCLES IN AMERICAN
HISTORY
Recession of 2001 and 9/11 (G.W. Bush)
As the war on terror progressed, the
economy slowly recovered to a point.
Negative public opinion about the war
on terror impacted the economy
again, influencing a decline at the end
of Bush’s presidency.
12.2

23. LESSONS FROM US ECONOMIC
HISTORY
There is no such thing as a continually
growing economy. A national economy will
experience peaks and troughs.
There is always the possibility of external
shocks.
12.2

24. LESSONS FROM US ECONOMIC
HISTORY
Recessions can hit no matter who’s in
charge.
There will always be a need for the Federal
Reserve to be actively involved in our
nation’s economy.
12.2

25. CHECK QUESTION 12.2B
Write complete question and answer on your Bell Ringer form.
How does the phrase “Whatever gets
you there is what you have to keep
doing to stay there” reflect the
conditions that led up to the recession
of 2001?