Understanding Business Cycles: Economic Fluctuations and Their Impact

1. Splash Screen

2. Chapter Introduction Section 1: Business Cycles and Fluctuations Section 2: Inflation Section 3: Unemployment Visual Summary Chapter Menu

3. Do your grandparents talk about the “good old days” when gas was 25 cents per gallon and a loaf of bread cost 10 cents? Compile a list of things that you have been purchasing for several years. Note the prices you paid in the past and those you are currently paying. What do you think accounts for the price differences? Read Chapter 13 to find out what factors can lead to economic instability. Chapter Intro 1

4. 1. Economists look at a variety of factors to assess the growth and performance of a nation’s economy. 2. The labor market, like other markets, is determined by supply and demand. Chapter Intro 2

5. Chapter Intro-End

6. Section Preview In this section, you will learn that business cycles are the alternating increases and decreases in the level of economic activity. Section 1-Preview

7. Content Vocabulary • business cycles • business fluctuation • recession • peak • trough • expansion • trend line • depression • depression scrip • leading economic indicator • composite index of leading economic indicators • econometric model Academic Vocabulary • innovation • series Section 1-Key Terms

8. A B C External shocks like high oil prices have what kind of impact on the economy? A. Drives the economy up B. Drives the economy down C.Economy stays the same. Section 1

9. Business Cycles and Fluctuations • Business cycles and business fluctuations can interrupt economic growth. • Economists predict where economy is headed so forecasting models and statistical tools are key to predicting these changes. Section 1

10. Business Cycles: Characteristics and Causes Business cycles are marked by alternating periods of expansion and recession. Section 1

11. Business Cycles: Characteristics and Causes (cont.) • Phases of the business cycle • Recession • Begins when the economy reaches a peak • Ends when the economy reaches a trough Business Cycles Section 1

12. Business Cycles: Characteristics and Causes (cont.) • Expansion • Begins after the declining real GDP bottoms out • Continues until economy reaches a new peak Section 1

13. Business Cycles: Characteristics and Causes (cont.) • The economy would follow a steady growth path, trend line, if periods of recession and expansion did not occur. • Severe recessions can turn into a depression. Section 1

14. Business Cycles: Characteristics and Causes (cont.) • Causes of business cycles • Changes in capital expenditures • Innovation and imitation • Monetary policy decisions • External shocks Section 1

15. A B C D Which may not be a cause of business cycles? A.New product developed B.Rising price of flour C.New method of production D. Federal Reserve lowers the Federal Funds Rate. Section 1

16. Business Cycles in the United States Business cycles have become much more moderate since the Great Depression of the 1930s. Section 1

17. Business Cycles in the United States(cont.) • “Black Tuesday,” October 29th, 1929, marked the beginning of the Great Depression. • Between 1929 and 1933, real GNP declined nearly 50%. • Unemployment rose nearly 800%. Section 1

18. Business Cycles in the United States(cont.) • Average wage plunged from 55 cents/hour to 5 cents/hour. • One-quarter of all banks failed. • Depression scrip used because official paper currency was in short supply Section 1

19. Business Cycles in the United States(cont.) • Causes of the Great Depression • Enormous gap in the distribution of income • Easy credit • Global economic conditions Section 1

20. Business Cycles in the United States(cont.) • Real GNP returned to its 1929 high in 1939. • Increased government spending and World War II spending propelled the economy. Section 1

21. Business Cycles in the United States(cont.) • Laws passed and government agencies were established to prevent another depression. • Social Security Act of 1935 • Minimum Wage • Unemployment programs Section 1

22. Business Cycles in the United States(cont.) • Securities and Exchange Commission • Federal Deposit Insurance Corporation • After World War II, business cycles had shorter recessions and longer periods of expansion. Section 1

23. A B C D Which form of legislation that resulted from the Great Depression do you find most appealing? A.Minimum wage law B.Creation of the Securities and Exchange Commission C.Federal Deposit Insurance Corporation D. Social Security Act Section 1

24. Forecasting Business Cycles Economists use statistics and models to predict business cycles. Section 1

25. Forecasting Business Cycles (cont.) • Methods used to predict business cycles • Statistical series • Leading economic indicator • Composite index of leading economic indicators (LEI) The Index of Leading Economic Indicators Section 1

26. Forecasting Business Cycles (cont.) • Macroeconomic modeling • Econometric model Section 1

27. A B C D How many leading economic indicators make up the composite index of leading economic indicators? A.8 B.10 C.12 D. 6 Section 1

28. Section 1-End

29. Section Preview In this section, you will find out that inflation is a rise in the general level of prices that disrupts the economy. Section 2-Preview

30. Content Vocabulary • inflation • deflation • price index • consumer price index (CPI) • market basket • base year • creeping inflation • hyperinflation • stagflation • producer price index (PPI) • implicit GDP price deflator • demand-pull inflation • cost-push inflation • creditor • debtor Section 2-Key Terms

31. Academic Vocabulary • construction • recover Section 2-Key Terms

32. A B C Inflation is A. when the cost of stables becomes extremely inexpensive B. an exceedingly high increase in prices C.a general level increase in prices Section 2

33. Inflation • Inflation—increase in the general level of prices • Deflation—decline in the general level of prices • Both are harmful to the economy and should be avoided whenever possible. Section 2

34. Measuring Prices and Inflation Several price indexes are used to measure inflation. Section 2

35. Measuring Prices and Inflation (cont.) • Measuring inflation • Price indexfor a range of items is constructed • Consumer price index (CPI) • Select amarket basketand add up prices to determine value • Base year is selected forcomparison. Constructing the Consumer Price Index Section 2

36. Measuring Prices and Inflation (cont.) • Dollar cost of market basket is converted to a price index. • Percentage change of price index from one period to another is inflation. Measuring Prices and Inflation Section 2

37. Measuring Prices and Inflation (cont.) • Inflationary changes • Creeping inflation • Hyperinflation • Stagflation Section 2

38. Measuring Prices and Inflation (cont.) • Price indexes are constructed for all categories of the economy. • Producer price index (PPI) • Implicit GDP price deflator Section 2

39. A B C D Which price index is used the most by economists to determine inflation? A.PPI B.CPI C.CII D. GDP price deflator Section 2

40. Causes of Inflation Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money. Section 2

41. Causes of Inflation (cont.) • Causes for inflation • Demand-pull inflation • Cost-push inflation • Wage-price spiral • Excessive monetary growth Profiles in Economics:Milton Friedman Section 2

42. A B C D When the price level goes up, the purchasing power of the dollar goes A.Up B.Down C.Remains the same D. Depends Section 2

43. Consequences of Inflation Inflation can reduce purchasing power, distort spending, and affect the distribution of income. Section 2

44. Consequences of Inflation (cont.) • Effects of inflation • Reduced purchasing power • Distorted spending patterns The Purchasing Power of the Dollar Section 2

45. Consequences of Inflation (cont.) • Encourages speculation • Distorted distribution of income • Creditors are hurt more than debtorsgenerally. Section 2

46. A B C D Which sector of the economy has seen recent years of speculation? A.Real estate B.Gold C.Oil D. Alternative fuel Section 2

47. Section 2-End

48. Section Preview In this section, you will find out how unemployment is measured as well as what causes it. Section 3-Preview

49. Content Vocabulary • civilian labor force • labor force • unemployed • unemployment rate • frictional unemployment • structural unemployment • outsourcing • technological unemployment • cyclical unemployment • seasonal unemployment • GDP gap • misery index • discomfort index Section 3-Key Terms

50. Academic Vocabulary • confined • fundamental • unfounded Section 3-Key Terms