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Economics 11/7/11 NO SCHOOL: Professional Development Day. . Happy Eid al Adha to all the people. . Economics 11/8/11 NO SCHOOL: Professional Development Day. Election Day. Economics 11/9/11

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Economics 11 7 11 http mrmilewski com
Economics 11/7/11

  • NO SCHOOL: Professional Development Day.

Happy Eid al Adha to all the people.

Economics 11 8 11 http mrmilewski com
Economics 11/8/11

  • NO SCHOOL: Professional Development Day.

  • Election Day

Economics 11 9 11 http mrmilewski com
Economics 11/9/11

  • OBJECTIVE: Demonstration of Chapter#12 and begin examination of the business cycle. MCSS E-2.1.5

  • I. Administrative Stuff

    -attendance & distribution of test

  • II. Chapter#12 Test

  • III. Journal #34 pt.A

    -Examine the cartoon p.343

    -Answer the caption question p.343

    -Examine Figure 13.2

    -Answer the caption question p.345

  • IV. Journal #34 pt.B

    -notes on the business cycle

This week
This week

  • Chapter#13 section#1

  • Chapter#14 section#1

  • Chapter#14 section#3

  • Chapter#13&14 Test is Tuesday!

The business cycle
The Business Cycle

  • Business cycle - the rise and fall of GDP over time.

  • GDP – Gross Domestic Product

  • GDP= C+I+G+(X-M)

  • C – consumer

  • I – business

  • G – government

  • X – exports

  • M - imports

Phases of the business cycle
Phases of the Business Cycle

  • Ch#14 sec#1 p.376

The recession phase of the business cycle
The Recession Phase of the Business Cycle

  • There are two phases of the business cycle

  • Recession – when real GDP declines for two quarters in a row (6 months)

  • A recession begins following a peak

  • Peak – the point where GDP stops going up

  • A recession ends at a trough

  • Trough – the turnaround point where GDP stops going down.

The expansion phase of the business cycle
The Expansion Phase of the Business Cycle

  • Expansion – period of recovery from a recession.

  • Expansion begins at the trough of the business cycle.

  • Expansion ends when the business cycle reaches a new peak.

  • Since WWII, the average recession lasted 11 months. The average expansion lasted 43 months.

  • The expansion that began in March 1991 & almost ended in March 2001 is the longest in history. (1st and 3rd quarters of 2001 GDP dropped)

Cpi 2002 2011
CPI 2002-2011

Us real gdp 2006 2010
US Real GDP 2006-2010

Us real gdp 1999 2009
US Real GDP 1999-2009

Us real gdp 1990 2006
US Real GDP 1990-2006

Real gdp v unemployment
Real GDP v. Unemployment

Gnp v gdp

  • GDP- the dollar value of all final goods and services produced within a country’s national borders in a year.

  • GNP- the dollar value of all final goods, services, and structures produced with labor and property supplied by a countries residents.


  • If a recession becomes very severe, it may turn into a depression

  • A depression is a state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants

  • Between 1929 and 1933, GDP declined nearly 50% and unemployment rose 8 times!


  • Currency was in such short supply that towns, counties, chambers of commerce, and other civic bodies resorted to printing their own money, known as depression scrip

  • Several factors contributed to the Great Depression

  • One was the disparity in the distribution of income

  • Easy and plentiful credit also appears to have played a role

  • Global economic conditions also played a part as American tariffs on imports kept many countries from selling goods to the United States

Economics 11 10 11 http mrmilewski com
Economics 11/10/11

  • OBJECTIVE: Examine of the business cycle.

    MCSS E-2.1.4

  • I. Journal #35 pt.A

    -Questions on Econ U.S.A. episode#3

  • II. Quiz#19

  • III. Return of Chapter#12 Test

  • IV. Journal #35 pt.B

    -notes on the business cycle

Econ u s a episode 3
Econ U.S.A. episode #3

  • 1.) Why was Congress unable to determine the true severity of the Great Depression?

  • 2.) What was the result of this problem?

  • 3.) How did the U.S. Government prepare economically for WWII?

  • 4.) How does government spending affect the circular flow?

  • 5.) How did the environmental concerns of the 1970’s effect the economy?

  • 6.) How does the government know if the policies they enact have helped the economy?

This week1
This week

  • Chapter#13 section#1

  • Chapter#14 section#1

  • Chapter#14 section#3

  • Chapter#13&14 Test is Tuesday!

Figure 13.3 Flow of Economic Activity

The end of the depression
The End of the Depression

  • Massive government spending during World War II added a huge stimulant to the economy for most of the early 1940s

  • Recession returned in 1945, but it did not last

  • As soon as the war was over, consumers went on a buying binge that stimulated expansion again

  • Since 1965, there has been a recurring pattern of recessions and expansions

  • After 1980, however, recessions occurred less frequently

  • The expansion that began in 1991 is the longest expansion in United States history

Why business cycles
Why Business Cycles?

  • No one theory seems to explain past business cycles, or serves as a way to predict future ones

  • Changes in capital expenditures are one cause of business cycles

  • When the economy is expanding, businesses expect future sales to be high, so they invest heavily in capital goods

  • After a while, businesses may decide they have expanded enough and they begin to pull back on their capital investments

Inventory adjustments innovation
Inventory Adjustments & Innovation

  • Inventory adjustments, or changes in the level of business inventories, are a second possible cause of business cycles

  • Some businesses cut back on inventories at the first sign of an economic slowdown and then build them back up again at the first sign of an upturn

  • When a business innovates, it often gains an edge on its competitors because its costs go down or its sales go up

  • The imitating companies must invest heavily to do this, and an investment boom follows

Monetary policy
Monetary Policy

  • A fourth possible cause of business cycles is the credit and loan policies of the Federal Reserve System

  • When “easy money” policies are in effect, interest rates are low and loans are easy to get

  • Eventually the increased demand for loans causes interest rates to rise, which in turn discourages new borrowers

  • As borrowing and spending slow down, the level of economic activity declines


  • A final potential cause of business cycles is external shocks, such as increases in oil prices, wars, and international conflict

  • Some shocks drive the economy up, as when Great Britain discovered North Sea oil in the 1970s

  • Other shocks can be negative, as when high oil prices hit the United States in the early 1970s

Economics 11 11 11 http mrmilewski com
Economics 11/11/11

  • OBJECTIVE: Examine of the effects of monetary policy on the business cycle & types of inflation. MCSS E-2.1.7

  • I. Journal #36 pt.A

    -Read “Business Week Newsclip” p.362

    -Answer questions (1-2) p.362

  • II. Journal #36 pt.B

    -notes on the business cycle

  • III. Journal #36 pt.C

    -notes on the Commanding Heights (episode#2 day#2)


  • Inflation is a special kind of economic instability, one that deals with changes in the level of prices rather than the level of employment and output

  • To better understand inflation, we must first examine how it is measured

  • Then we can examine the causes of inflation and its consequences

  • In order to find inflation, we start with the price level, the relative magnitude of prices at one point in time

  • To measure the price level, economists select a market basket of goods


  • They then construct a price index such as the consumer price index (CPI), the producer price index, or the implicit GDP price deflator

  • Prices tend to rise faster during expansions and then slow down during recessions

  • On rare occasions, unusual circumstances may cause deflation, or a decrease in the general price level

The rate of inflation

Figure 14.5

The Rate of Inflation

Types of inflation
Types of Inflation

  • Creeping inflation - inflation in the range of 1 to 3 percent per year

  • Galloping inflation - a more intense form of inflation that can go as high as 100 to 300 percent

  • When inflation gets totally out of control, hyperinflation - inflation in the range of 500 percent a year and above–occurs

Causes of inflation
Causes of Inflation

  • Nearly every period of inflation is due to one of the following causes

  • First explanation demand-pull theory - all sectors in the economy try to buy more goods and services than the economy can produce

  • As C + I + G converge on stores, shortages occur and prices go up

Causes of inflation1
Causes of Inflation

  • Second explanation - federal government’s deficit - blames inflation only on the federal government’s deficit spending

  • Third explanation claims that rising input costs (cost push)–especially labor–drive up the cost of products for manufacturers and cause inflation

Causes of inflation2
Causes of Inflation

  • Still another explanation says that no single group is to blame for inflation

  • According to this view, a self-perpetuating wage/price spiral of wages and prices begins that is difficult to stop

  • The final and most popular explanation for inflation is excessive monetary growth

  • This occurs when the money supply grows faster than real GDP

  • Inflation cannot be maintained without a growing money supply to fuel it

Consequences of inflation
Consequences of Inflation

  • When inflation is present, it can have a disruptive effect on an economy for several reasons

  • The most obvious effect of inflation is that the dollar buys less

Consequence of inflation
Consequence of Inflation

  • Decreased purchasing power is especially hard on retired people with fixed incomes because their money buys a little less each month

  • A second destabilizing effect is that inflation can cause people to change their spending habits, which disrupts the economy

  • A third destabilizing effect of inflation is that it tempts some people to speculate heavily in an attempt to take advantage of a higher price level

  • Finally, inflation alters the distribution of income

  • During long inflationary periods, lenders are generally hurt more than borrowers

  • Loans made earlier are repaid later in inflated dollars