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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 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 • Recession from July 1990 to March 1991 • Expansion from March 1991 to the end of 2000. (the longest expansion in the US history)
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.
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)
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
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