Chapter 3EconomicActivity in aChanging WorldSection 3.2The BusinessCycle

Bell Ringer Activity

Think about a local sports team. Discuss winning and losing streaks, and compare them to the economy.

Read to LearnDescribe the four stages of the business cycle.

Explain how individuals and government influence the economy.

The Main IdeaIn 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.

Key ConceptsGuiding the Economy

Four Stages of the Business Cycle

Guiding the Economy

Congress and the President enact laws that impact fiscal policy.

Government expenditures are often planned to guide the economy.

Guiding the Economy

The Federal Reserve (“the Fed”) is a government agency that guides the economy.

Guiding the EconomyThe Federal Reserve

Regulates the amount of money in circulation

Controls interest rates

Controls the amount of

money loaned

State and local governments also take steps to influence their economies

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Four Stages of the Business Cycle

business cyclethe rise and fall of economic activity

The business cycle of one country can affect other trading partners.

Business Cycle ModelFigure 3.1

Prosperity

Prosperity results from low unemployment, high production of goods and services, and the opening of new businesses.

prosperitya peak of economic activity

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Characteristics of Prosperity

Higher wagesGreater demand for goods to be producedMore people buy houses, which creates work for buildersPeople buy more goods from other countries, which benefits those countries

Recession

During a recession, businesses produce less, so they need fewer workers.

recessionwhen economic activity slows down

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Characteristics of a Recession

Businesses produce lessUnemployment increasesPeople have less money to spendFewer goods and services are producedThe GDP declines

Recession

A recession in one industry can cause a ripple effect throughout the entire economy.

Depression

A depression can be limited to one country but usually spreads to related countries.

depressiona deep recession

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Characteristics of a Depression

High unemploymentLow production of goods and servicesCan last for several yearsSpreads to other countriesHigh number of unused manufacturing facilitiesVery rare

Depression

The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression.

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TheGreat

DepressionThe GDP fell

nearly 50percent

Unemploymentrose nearly800 percent

The averagemanufacturingwage was 5

cents an hour

Many banksaround the

countryfailed

The moneysupply fell

by one-third

Many townsand other civic bodies printed

their own money

Recovery

Production starts to increase during a recovery.

recoverya rise in business activity after a recession or depression

RecoveryCharacteristics of a Recovery

People start going back to workPeople have money to purchase goods and servicesDemand for goods and services stimulates more productionNew businesses openBusinesses 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.