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Business Cycle

Business Cycle. Chapter 15. Definition and History. Def. A periodic but irregular up and down movement in production and jobs Two phases (expansion and recession) and two turning points (peak and trough) Recession: a decrease in real GDP that lasts for at least two quarters Current cycle

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Business Cycle

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  1. Business Cycle Chapter 15

  2. Definition and History • Def. • A periodic but irregular up and down movement in production and jobs • Two phases (expansion and recession) and two turning points (peak and trough) • Recession: a decrease in real GDP that lasts for at least two quarters • Current cycle • Recession from July 1990 to March 1991 • Expansion from March 1991 to the end of 2000. (the longest expansion in the US history)

  3. Definition and HistoryContinued • US business cycle history • Since 1854, 31 completed cycles with the average length of an expansion of 35 months and the average length of a recession of 18 months. • During the 20th century, complete cycles have lengthened. • During the 20th century, expansions have lengthened while recessions have shortened.

  4. Causes of Business Cycle • Due to changes in AD and AS • AD fluctuations • Profit expectations (optimism) • Changes in government taxes and purchases • Changes in money supply and interest rate • Changes in foreign demand • AS fluctuations • Changes in the quantity or price of factors of production (e.g. crude oil price) • Stagflation: a combination of inflation and recession • Possible with decline in AS (the 74-75 and 79-80 recessions)

  5. Causes of Business CycleContinued • Examples • 1974-1975 recession • Crude oil price increase  higher cost of production  AS decline  recession (stagflation) • 1982 recession • Decrease in M  AD decline  recession • 1982-1990 expansion • Reagan tax cuts and star wars spending  AD increase  expansion • 1991-2000 expansion • Technology revolution  optimism  AD increase  expansion

  6. Adjustment Toward Full Employment • Why repeating the cycle? • Because of forces that move the economy back toward full employment • Inflationary gap when real GDP > potential GDP  prices rise  wages rise  higher costs causing a decline in AS  elimination of inflation gap • Deflationary gap when real GDP < potential GDP  prices fall  wages fall  lower costs causing an increase in AS  elimination of deflation gap

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