MORE ON THE BUSINESS CYCLE

1. MORE ON THE BUSINESS CYCLE EXPANSION – REAL GDP IS RISING PEAK – TOP OF REAL GDP IN CURRENT CYCLE RECESSION – REAL GDP IS FALLING TROUGH – BOTTOM OF REAL GDP IN CURRENT CYCLE CYCLE – ONE COMPLETE EXPANSION, PEAK, RECESSION, AND TROUGH

2. THE RECENT BUSINESS CYCLE

3. WHAT CAUSES THE “DOWN” PART OF THE BUSINESS CYCLE – RECESSIONS? A SHOCK TO THE SYSTEM BY DEFINTION, A SHOCK IS UNEXPECTED – SO RECESSIONS AREN’T PREDICTABLE THE SHOCK MOVES THE ECONOMY AWAY FROM “EQUILIBRIUM” – LIKE A STRONG WIND KNOCKING YOU DOWN!

4. ONE OF MOST COMMON SHOCKS – “POPPING” OF AN “INVESTMENT BUBBLE” INVESTORS BID UP A MARKET TO UNSUSTAINABLE LEVELS SOMETHING TRIGGERS A SELL-OFF – TURNS INTO A FULL-SCALE RETREAT EXAMPLES: “TECH BUBBLE” OF LATE 1990- LED TO RECESSION OF 2001 “HOUSING BUBBLE” OF 1997-2007 - LED TO RECESSION OF 2007-2009

5. THE HOUSING BOOM AND BUST(% CHANGE IN AVERAGE HOUSING PRICE)

6. DISRUPTION IN SUPPLY OF A KEY INPUT TO THE ECONOMY DISRUPTION IN SUPPLY OF OIL AND CONSEQUENT SIGNIFICANT INCREASE IN ITS PRICE LED TO TWO RECESSIONS IN THE 1970S

7. ANOTHER REASON FOR RECESSIONS – CHANGE IN LAWS THAT MAKE DOING BUSINESS MORE COSTLY TWO EXAMPLES: BIG JUMP IN TARIFFS IN EARLY 1930S – SOME SAY TURNED A RECESSION INTO A DEPRESSION TAX LAW CHANGES UNFAVORABLE TO COMMERCIAL REAL ESTATE IN LATE 1980S – LED TO RECESSION OF 1990-1991

8. LAST, RECESSIONS CAN BE DIRECTLY CAUSED BY GOVERNMENT POLICIES EXAMPLE: INFLATION WAS SKY-HIGH IN LATE 1970S (12% ANNUALLY) FED RESERVE HEAD PAUL VOLCKER INCREASED INTEREST RATES, TOOK MONEY OUT OF THE ECONOMY, AND PLUNGED THE ECONOMY INTO A RECESSION – BUT SILVER LINING WAS INFLATION WAS REDUCED