Boom or Bust – Business Cycles – Flashcards

Economic fluctuations (ups and downs) that we all experience. A business cycle consists of a period of expansion (up) and a period of contraction (down).

When real GDP ( gross domestic product) increases then economic activities grow and the economy grows. More jobs are created to produce more goods and services. When the GDP decreases the economy declines. When the economy declines unemployment increases because less jobs are created or jobs are lost. So unemployment decreases economy activity. Same way, when the unemployment decreases the economy grows. The reverse is true for inflation (rapid rise in prices). When the inflation rates increases is because the economy is blooming and when the inflation rate decreases that means that Businesses bring their prices down to stimulate the buyers to buy more but it also means that the economy is slowing down so hiring stops and unemployment increases.

It provides a higher standard of living, creates new and additional jobs, enable the government to fulfill its duties more thoroughly and resolves domestic problems.

Because they will be able to take steps to avoid the extreme ups and downs of business cycles and make plans to help smooth out extreme fluctuations in the economy.

Business cycles are irregular. It is difficult to predict the exact beginning and end of business cycle. Because there is no precise way to predict business cycles the uncertainty felt by the consumers and producers rises.

Expansion Peak Contraction Trough

this is the growth period of a business cycle. It is the time the business cycle prospers. The consumers income increases and they start spending more and aas a result the business profit or gain grows. Because there is more spending there is an increase in the demand of products and services and more workers are needed so more jobs are created so unemployment decreases. The interest rates on loans decrease or lower so people eventually borrows more money. So the economy grows

Eventually the economy reaches a high point or PEAK. The demand of product exceeds the supply so the prices rise. Interest rates also rise. People start saving more money and spending less so the economy levels off.

When the demand of goods and services start to decrease unemployment rises and the PEAK passed. Contraction is the period of diminishing (decreasing) economic activity. This is considered a BAD time for consumers and businesses. This not only affects everyone financially but also emotionally (unemployment rises, crime rate rises, family crises rises, etc. thee society is affected). When this contraction last for 6 months or more a RECESSION is said to exist and when this recession continues and is severe a DEPRESSION exists

This is the low point of economic activity (rock-bottom). Many businesses fail or close and unemployment is very high. A trough is sometimes seen as a positive sign because hitting rock bottom implies that an economic RECOVERY is on its way Recovery is considered the initial phase of EXPANSION.

Multiple factors can cause business cycles. Causes of business cycles can be divided into two major categories: internal factors (because they take pace within the economic system itself) and external ( they take place outside of the economic system) .

includes: aggregate demand money supply investment in capital goods inventory levels.

includes: political changes international relations discoveries and innovation psychological changes

the total demand for an economic's good and services. Aggregate demand rises when consumers want more goods and services. It can pull the GDP and employment up or down to cause business cycles. It decreases when production and employment decreases.

The total quanity of money which exists at one time in a nation. If it goes up the economy goes up and viceversa. The Federal government can manipulate the nation's money supply through monetary policy and fiscal policy.

determines the amount of money that is in circulation and the level of interest rates.

involves using taxation and government spending to influence the flow of money

when producers are hopeful and optimistic they buy new equipment, build new business/facilities and expand (capital goods). This increase in capital goods increases the economic activities (expansion) but when the investment in capital goods decreases so does the economy (contraction).

When producers are hopeful and optimistic they increase the inventory levels to prepare for expected increase in demand of supplies. This expands the economy but when they suspect that consumers will not buy all the products they have in stock they stop buying new goods and focus on selling what they already have casing the economy to contract.

a change in a political party in power cn casue a change in the economy. Example, political officials who support businesses interests will casue the economy to expand

climatic changes can cause fluctuations in economy. Many jobs in the construction and agriculture vary according to the climatic conditions (droughts will decrease crops which will decrease selling of products, so is blizzards, floods.... all these affect negatively the economy)

the interaction of our nation with other countries can expand or contract our economy. A war may increase production of defense material and expand the economics activities but when it ends the economic activities contract.

the discovery and development of new products techniques and resources often stimulates the economy by creating new jobs to create and improve these products (like computers, cellphones, internet, etc)

peoples emotional reactions can also expand or contract the economy. When the 911 terrorist attacks occurred life as well as the economy seem to come to a standstill. Customers drastically cut back in their spending and the economy declined causing a long recession.