impact of business cycles boom or bust economics lap 9
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Impact of Business Cycles
Boom or Bust
Economics LAP 9
Objectives:
Impact of Business Cycles
Explain the phases of a business cycle.
Summarize causes of business cycles.
Boom or Bust
Economics LAP 9
Explain the phases of a business cycle.
Rosalie works as a babysitter.
Her income is not steady.
• Sometimes, they have loads of money.
• At other times, they don’t go out at all.
Everyone experiences economic ups and downs.
The parents who hire her don’t have a very stable amount of spending money.
What Are Business Cycles?What Are Business Cycles?
Economic fluctuations
Ups and downs in our economy
Periods of expansion and contraction in economic activities
Economic fluctuations
Ups and downs in our economy
Periods of expansion and contraction in economic activities
The Impact of Business Cycles
Business cycles affect every economic activity, including
Business cycles affect every economic activity, including
Production Consumption
Production Consumption
Exchange Distribution
Exchange Distribution
When real GDP increases: When real GDP increases:
Economic activities increase. The economy grows.
Economic activities increase. The economy grows.
Economic activities decrease. We experience an economic
decline.
Economic activities decrease. We experience an economic
decline.
Business Cycles and Real Gross Domestic Product (GDP)
When real GDP decreases: When real GDP decreases:
Business Cycles and Other Economic Indicators
Unemployment
When our unemployment rate goes up, our economy declines.
When the unemployment rate goes down, our economy grows.
Inflation
When inflation goes up, our economy is booming.
Inflation drops when economic activities slow down.
Benefits of a Growing Economy
Providing a higher standard of living
Creating new and additional jobs
Enabling the government to fulfill its duties more thoroughly
Resolving domestic problems
Avoiding the Extreme Ups and Downs
By understanding whether business activities are getting ready to expand or contract, business leaders can take steps to avoid extreme economic ups and downs.
By understanding whether business activities are getting ready to expand or contract, business leaders can take steps to avoid extreme economic ups and downs.
They can anticipate necessary changes in:
They can anticipate necessary changes in:
• Employment
• Production
• Employment
• Production
• Pricing
• Purchasing
• Pricing
• Purchasing
The Unpredictability of Business Cycles
There is no way to accurately predict the length or severity of business cycles.
It’s also difficult to predict the exact beginning and ending of a business cycle.
Business cycles are inherently irregular.
Phases of Business Cycles
Expansion Peak Contraction Trough
Economic ExpansionEconomic Expansion
Economic Expansion
• Business profits go up.
• New businesses open.
• Existing businesses invest in new equipment.
It is a time of economic prosperity and growth.
• Consumers’ incomes increase.
They spend more money on durable goods.
Economic Expansion
• Production increases.
• Demand increases.
• More workers are hired.
• Additional business facilities are built.
It is a time of economic prosperity and growth.
Economic Expansion
• Interest rates on loans decrease.
• Consumers and producers borrow and spend more money.
The Federal Reserve System puts more money into circulation.
Reaching the PeakReaching the Peak
Economic prosperity eventually reaches a high point—the peak.
Demand for many products begins to exceed the supply.
• Prices rise.
Demand for low-interest-rate loans exceeds their availability.
• Interest rates rise.
Consumers and producers begin to feel less hopeful about the future.
• They start to save more and spend less.
• Demand declines.
• Economic activities level off.
Reaching the PeakReaching the Peak
Economic ContractionEconomic Contraction When demand starts to fall
and unemployment rises, contraction begins.
It is a bad time for consumers and businesses.
• Consumers continue to spend less
and save more.
• Businesses postpone purchasing new equipment.
• Few new businesses are started.
• Businesses earn less profit, experience losses, or close.
Economic ContractionEconomic Contraction
It is a bad time for consumers and businesses.
• Businesses decrease production.
• Sales are sluggish.
• Inventories build up.
• Workers lose their jobs or experience a drop in pay.
Economic ContractionEconomic Contraction
It is a bad time for consumers and businesses.
• Demand falls.
• Businesses decrease prices to attract customers.
• Interest rates decrease.
• Economic activities diminish.
Economic ContractionEconomic Contraction
During a contraction, social problems often increase.
• Poverty
• Crime
• Alcoholism
• Marital problems
• Suicides
Economic ContractionEconomic Contraction
Some contractions become recessions or depressions.
Characteristics of a recession:
• A contraction that is at least six months long
• Unemployment as high as 10 or 12%
Economic ContractionEconomic Contraction
Characteristics of a depression:
• A recession that continues and is severe
• Many business failures
• Unemployment as high as 25%
Entering the TroughEntering the Trough
The trough is the low point of economic activity.
• Many more businesses fail.
• Unemployment is very high.
The economy will stay at this low point until consumers and producers become hopeful about business and buy more products.
A trough is sometimes seen as a positive sign—hitting rock-bottom implies that a recovery is on its way.
Entering the TroughEntering the Trough
Summarize causes of business cycles.
Causes of Business CyclesCauses of Business Cycles Multiple factors cause business cycles.
A change in one factor leads to changes in others.
Causes of business cycles can be divided into two major categories:
• Internal
• External
Internal FactorsInternal Factors
Take place within the economic system itself
Internal Factors: Aggregate DemandInternal Factors: Aggregate Demand
Is the total demand for an economy’s products
Can pull the GDP and employment up or down to cause business cycles
Internal Factors: Aggregate DemandInternal Factors: Aggregate Demand
Rises when consumers want more products
SupplyDemand
Demand-pull inflation
Demand-pull inflation: Inflation that occurs because aggregate demand exceeds the available supply.
• Production increases.
• More workers are hired.
• Employees earn more wages.
• Production may not be able to meet the growing demand, which results in inflation (higher prices).
Internal Factors: Aggregate DemandInternal Factors: Aggregate Demand
If aggregate demand decreases:
• Production and employment decrease.
• Inventories build up.
• A recession or depression can result.
• Production and employment decrease.
• Inventories build up.
• A recession or depression can result.
Money supply: The total quantity of money which exists at one time in a nation
If a nation’s money supply goes up or down, the economy soon follows.
Internal Factors: Money Supply
Internal Factors: Money Supply
The government restricts the flow of money by:
• Raising taxes
• Raising interest rates
• Buying less
The federal government can manipulate the money supply through monetary and fiscal policy.
Internal Factors: Money Supply
Internal Factors: Money Supply
The government increases the amount of money in circulation by:
• Spending more
• Lowering interest rates
• Lowering taxes
The federal government can manipulate the money supply through monetary and fiscal policy.
Internal Factors: Money Supply
Internal Factors: Money Supply
More money is borrowed.
Production increases.
More work is available.
Unemployment is low.
Economic activities grow.
When interest rates are low and money is plentiful:
Internal Factors: Money Supply
Internal Factors: Money Supply
Unemployment is high.
Business activities slow down.
A period of contraction begins.
When money is in short supply:
Internal Factors: Money Supply
Internal Factors: Money Supply
Internal Factors: Investment in Capital Goods
When producers are hopeful about the future, they:
• Buy new equipment
• Build new business facilities
• Expand their existing facilities
• Cause economic activities to expand
• Buy new equipment
• Build new business facilities
• Expand their existing facilities
• Cause economic activities to expand
Internal Factors: Inventory Levels
When producers are optimistic about business:
• They increase their inventory levels to prepare for expected increases in demand.
• Economic activities expand.
• They increase their inventory levels to prepare for expected increases in demand.
• Economic activities expand.
Increase inventory levels
Internal Factors: Inventory Levels
When producers become less hopeful:
• They decrease their buying of new goods and focus on selling their current inventory.
• The economy contracts.
• They decrease their buying of new goods and focus on selling their current inventory.
• The economy contracts.
External FactorsExternal Factors
Take place outside
the economic system
External Factors: Political Changes
External Factors: Political Changes
A change in the political party can cause changes in economic activities.
External Factors: Climatic Changes
External Factors: Climatic Changes
Jobs in agriculture and construction vary according to climatic conditions.
Drought, floods, and blizzards can negatively affect the economy.
External Factors: International Relations
The interaction of our nation with other countries impacts the economy.
External Factors: Discoveries and Innovation
The discovery and / or development of new products, techniques, and resources often stimulate our economy.
H.P. flexible computer screen in research and development
• Large sums of money must be invested.
• New jobs are created.
• Large sums of money must be invested.
• New jobs are created.
External Factors: Psychological Changes
People’s emotional reactions to life-altering national or international events can expand or contract the economy.
• Which phase of the business cycle are we experiencing?
• How have you been affected?
• Are you doing better or worse?
• What will the economy look like in a year?
• How can you prepare for that future?
Some economists claim that elected officials use business cycles to achieve their own political goals.
Supposedly, government leaders cause the economy to:
• Expand before an election
• Contract after being reelected
Is this possible?
Do our elected leaders cause business cycles?
If so, is it ethical?
Why or why not?
Digital-based photography sources:Digital-based photography sources:
Jupiter Images UnlimitedVarious images used in this presentation are ©2009 Jupiter Images Unlimited. All rights reserved www.jiunlimited.com
MBAResearchAcknowledgments
Original DevelopersLelia Ventling,
April J. Miller, MBAResearch
Version 1.0
Copyright © 2011MBA Research and Curriculum Center®
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