Section 12.1 β€” The Business Cycle

  • πŸ’‘ Key Concept: Supply, Demand, and Price

    • When demand is high but supply is low, prices rise.

    • When demand is low, prices fall.

    • These price movements reflect overall economic health and consumer behavior.

πŸ”„ The Business Cycle:

The economy naturally moves through four main stages in a repeating pattern:

  • Expansion

    • Characterized by:

      • Increased consumer demand for goods and services

      • Higher industrial production

      • Rising stock prices and property values

      • Growing GDP

    • Also called a recovery (when moving from a low to a prior high point).

  • Peak (Prosperity)

    • Marks the height of economic growth before slowing begins.

    • Features:

      • Very low unemployment

      • Slowing inflation

      • Stable consumer demand

      • Slower GDP growth

  • Contraction (Downturn)

    • Occurs when the economy begins to slow down.

    • Indicators:

      • Rising bankruptcies and bond defaults

      • Higher consumer debt

      • Falling stock prices

      • Rising inventories (less consumer spending)

      • Decreasing GDP

    • If contraction lasts:

      • 6 months (2 quarters) β†’ it’s a recession

      • 18 months or more β†’ it’s a depression (rare)

  • Trough

    • The lowest point of the cycle β€” the economy has bottomed out.

    • Characterized by:

      • High unemployment

      • Flat GDP

      • Low inflation

      • Low (but stable) consumer demand

πŸ“Š Examples of Economic Downturns

  • Recession of the Early 1990s

    • Began: July 1990

    • Lasted: ~8 months

    • GDP:

      • Q1 1991: βˆ’0.95%

      • Q2 1991: βˆ’0.54%

      • Q3 1991: βˆ’0.10%

    • Considered a mild recession.

  • The Great Recession (2008–2009)

    • Began: Q4 2008 (GDP βˆ’2.75%)

    • Continued through first 3 quarters of 2009:

      • Q1: βˆ’3.29%

      • Q2: βˆ’3.92%

      • Q3: βˆ’3.05%

    • Nearly met the definition of a depression, ending just short of 18 months.

Business Cycle

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Business Cycle 〰️

✺ Review questions ✺

  • Expansion, Peak, Contraction, Trough.

  • Rising GDP, higher consumer demand, increased industrial production, and rising stock/property prices.

  • Very low unemployment, stable consumer demand, slowing inflation, and slower GDP growth.

  • A contraction lasting 6 months (2 quarters) or more.

  • A contraction lasting 18 months or more.

  • Rising bankruptcies, bond defaults, higher consumer debt, falling stock prices, rising inventories, and decreasing GDP.

  • High unemployment, flat GDP, low inflation, and low but stable consumer demand.

  • Nearly 18 months; it came close to being classified as a depression.