Economic Instability Macroeconomics Principles Business Cycles Cycle Systematic

Economic Instability Macroeconomics Principles

Business Cycles • • • Cycle: Systematic ups and downs of GDP Natural Inevitable Necessary Phases – Recession: 2 quarters of GDP decline – Expansion: GDP increase • Points – Peak: Point where real GDP stops going up – Trough: Point where real GDP stops going down • Depression: steep fall in GDP, high unemployment, over a year in length

The Phases of the Business Cycle 0 Mc. Graw-Hill/Irwin Bo Total Output om Expansion Recession Peak Do Expansion rn tu p U wn tu r n Trough Secular growth trend Jan. - Apr. - July- Oct. - Jan. - Apr. Mar June Sept. Dec. Mar June © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Real GDP 1958 -2007, in 2000 dollars • Note: “Years” is on horizontal axis and “real GDP” is on vertical axis. • General trend of economic growth • Recession years are shaded blue: note downward slope on graph indicating that GDP is decreasing. Note: Shaded areas indicate recessions.

U. S. real gross domestic product person from 1900 to 2004

The Conventional Three. Phase Business Cycle Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 10 -4

Post-World War II Recessions* *The February 1945–October 1945 recession began before the war ended in August 1945. Note: These recessions were of varying duration and severity.

Another Look at Expansions and Recessions Can you find a pattern? Neither can economists! That’s why recessions are hard to predict.

Causes of Business Cycles • • • Capital expenditures Inventory adjustments Innovation and Imitation Monetary Factors External Shocks – War – Oil supply and prices – Bubbles

EOCT Question • Over a two-year period, the nation of Parthia experiences a decline in unemployment rate, a rise in real GDP, and a stabilized price level. Parthia appears to be • A. At the start of a recession • B. In the middle of a depression • C. Stagnating economically • D. In the middle of a boom period