Chapter 3 Economic Activity in a Changing World

Chapter 3 Economic Activity in a Changing World Section 3. 2 The Business Cycle

Read to Learn Describe the four stages of the business cycle. Explain how individuals and government influence the economy.

The Main Idea In 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 Concepts Guiding the Economy Four Stages of the Business Cycle

Key Terms business cycle the rise and fall of economic activity over time prosperity the peak of economic activity

Key Terms recession when economic activity slows down depression a deep recession that affects the entire economy and lasts for several years

Key Term recovery a rise in business activity after a recession or depression

Four Strategies of the Business Cycle In groups – Discuss how prosperity in another country can affect the economy in the United States.

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.

Graphic Organizer Guiding the Economy The 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

Four Stages of the Business Cycle The business cycle of one country can affect other trading partners. business cycle the rise and fall of economic activity

Figure 3. 1 Business Cycle Model

Prosperity results from low unemployment, high production of goods and services, and the opening of new businesses. prosperity a peak of economic activity

Graphic Organizer Characteristics of Prosperity Higher wages Greater demand for goods to be produced More people buy houses, which creates work for builders People buy more goods from other countries, which benefits those countries

Recession During a recession, businesses produce less, so they need fewer workers. recession when economic activity slows down

Graphic Organizer Characteristics of a Recession Businesses produce less Unemployment increases People have less money to spend Fewer goods and services are produced The 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. depression a deep recession

Graphic Organizer Characteristics of a Depression High unemployment Low production of goods and services Can last for several years Spreads to other countries High number of unused manufacturing facilities Very rare

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

Graphic Organizer Unemployment rose nearly 800 percent Many banks around the country failed The Many towns The GDP fell Great and other civic nearly 50 Depression bodies printed percent their own The average The money manufacturing supply fell wage was 5 by one-third cents an hour

“Depressionproof” During the Great Depression, millions of people lost their homes and livelihoods. A large percentage of middle-class Americans were able to keep their jobs. These people were in professions considered “depressionproof. ”

Recovery Production starts to increase during a recovery a rise in business activity after a recession or depression

Recovery Characteristics of a Recovery People start going back to work People have money to purchase goods and services Demand for goods and services stimulates more production New businesses open Businesses 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.

1. What is the stage that follows a recession or depression? The recovery stage can happen after either a recession or a depression.

2. What is the difference between a recession and a depression? A recession is a slight downturn; a depression is a major downturn.

3. Why may innovation play an important role in the recovery stage of a business cycle? Innovation creates demand that leads to more employment and production, which leads to more demand.

End of Chapter 3 Economic Activity in a Changing World Section 3. 2 The Business Cycle