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Economic Conditions Change. Intro to Business 2-2. The Business Cycle. All economies experience good and bad economic periods This economic shift between good and bad economic conditions is called the business cycle . Business cycles have four phases Prosperity Recession Depression

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Intro to business 2 2

Economic Conditions


Intro to Business


The business cycle
The Business Cycle

  • All economies experience good and bad economic periods

  • This economic shift between good and bad economic conditions is called the business cycle.

  • Business cycles have four phases

    • Prosperity

    • Recession

    • Depression

    • Recovery


  • Prosperity is a period in which most people who want to work are working, wages are high, and the rate of GDP growth increases.

  • Demand for goods and services is high.

  • Prosperity is usually the high point of the business cycle.


  • Occurs when the economy slows down from the prosperity phase.

  • A recession is a period in which demand begins to decrease as production decreases, unemployment begins to rise, and GDP growth slows for two or more quarters,

  • May not be serious, but often signals trouble for workers in related businesses.

  • Eventually weakens economy and total output declines in the next quarter.


  • Occurs when a recession deepens and spreads throughout the entire economy.

  • Depression is a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures.

  • GDP falls rapidly.

  • Has not occurred in the US since the 1930’s.


  • Recovery is the phase in which unemployment begins to decrease, demand increases, and GDP begins to rise.

  • Can occur quickly or slowly

  • Consumer confidence increases

  • Returns the country to the prosperity phase.

Consumer prices
Consumer Prices

  • Buying power of money changes over time.

  • Technology becomes less expensive over time

  • Amounts of an item may be sold for the same price in smaller quantities.

  • Changes may occur as either inflation or deflation.


  • An economic issue that all developed nations must deal with.

  • Inflation is an increase in the general level of prices

  • Decreases buying power of the nation’s currency.

  • Most harmful to families living on fixed incomes.

  • Retirees and others on fixed income cannot afford as many goods or services.

Causes of inflation
Causes of Inflation

  • When demand for goods or services in greater than supply.

  • Wages tend to rise during inflation, but prices usually rise faster.

  • Typically considered harmful, as consumers must earn more money to maintain the same standard of living.

  • If wages increase too quickly, business tend to hire fewer workers, raising unemployment.

Measuring inflation
Measuring Inflation

  • Inflation rates vary.

  • Mild inflation (around 2 or 3 percent) can stimulate economic growth as prices increase faster than wages, allowing the producer to hire more workers.

  • The most watched measure of inflation in the US is the Consumer Price Index (CPI).

  • A price index is a number that compares prices in one year with prices in some earlier base year.

  • Cost of living inflation may change differently than the products used to calculate inflation with the CPI.


  • Deflation is the opposite of inflation.

  • Deflation means a decrease in the general level of prices.

  • Usually occurs in recession and depression.

  • Even though prices drop, people tend to have less money to afford them.

  • Occurred most significantly during the Great Depression

  • Many technological products are deflating in price as technology advances.

Cool web resources
Cool Web Resources












Interest rates
Interest Rates

  • Interest rates represent the “cost of money.”

  • Interest rates have a strong influence on business activities.

  • Companies and governments that borrow money are affected by interest rates.

  • Consumers are affected by interest rates.

  • Interest on loans reflects current interest rates, as to earnings from savings and investments.

Types of interest rates
Types of Interest Rates

  • There are many different types of interest rates that represent the cost of money in different settings.

    • The prime rate is the rate banks make available for their best customers, such as large corporations

    • The discount rate is the rate financial institutions are charged to borrow funds from Federal Reserve banks.

    • The T-bill rate is the yield on short-term (13 week) U.S. government debt obligations.

Types of interest rates cont
Types of Interest Rates (cont.)

  • The treasury bond rate is the yield on long-term (20 year) U.S. government debt obligations.

  • The mortgage rate is the amount individuals pay to borrow for the purchase of a new home.

  • The corporate bondrateis the cost of borrowing for large U.S. corporations.

  • The certificate of deposit rate is the rate for time deposits at savings institutions.

Changing interest rates
Changing Interest Rates

  • The cost of money changes every day due to various factors.

  • The supply and demand for money is the major influence on the level of interest rates.

  • As amounts saved increase, interest rates tend to decline.

  • When borrowing by consumers, businesses, and government increases, interest rates are likely to rise.

  • See assignment in G:drive (Banks)