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Business Cycle

Business Cycle. Phases of the Business Cycle. Expansion (Growth) Peak (Top) Contraction (Shrinking) Trough (Bottom. Expansion. High demand for goods More jobs People are optimistic and spend money Businesses start More profits and higher stock value Higher wages Lower unemployment.

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Business Cycle

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  1. Business Cycle

  2. Phases of the Business Cycle • Expansion (Growth) • Peak (Top) • Contraction (Shrinking) • Trough (Bottom

  3. Expansion • High demand for goods • More jobs • People are optimistic and spend money • Businesses start • More profits and higher stock value • Higher wages • Lower unemployment

  4. Peak • Economy stops growing • GDP reaches its maximum • Businesses stop hiring • Cycle begins to contract (or shrink)

  5. Contraction • Businesses cut production and lay off workers • Number of jobs declines • Unemployment increases • People are pessimistic and stop spending money • Banks limit loans

  6. Trough • The Economy “bottoms-out” (reaching its lowest point) • High unemployment • Stock prices drop • We can only go up Unless…

  7. Recession/Depression • A prolonged contraction is called arecession (contraction for over 6 months) • A recession of more than one year is called adepression

  8. What keeps the Business Cycle Going? • 4 variables cause changes in the Business Cycle: • Business Investment When the economy is expanding, sales and profit keep rising, so companies invest in new plants and equipment, creating new jobs and more expansion. In contraction, the opposite is true

  9. What Keeps the Business Cycle Going? • Interest Rates and Credit Low interest rates, companies make new investments, adding jobs. When interest rates climb, investment dries up and less job growth • Consumer Expectations Forecasts of an expanding economy fuels more spending, while fear of a recession decreases consumer spending

  10. What keeps the Business Cycle Going? • External Shocks External Shocks, such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy Ex. 1992-2000 was the longest period of expansion in U.S. history. Early in 2001, signs of contraction appeared, though the Bush administration denied it. The Sept. 11th 2001 terrorist attacks quickly caused the business cycle to shift into a contraction.

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