Ch.+12.2

Ch. 12.2 Notes Pg: 310-316 Questions #1-6
 * Phases of a Business Cycle**
 * **Business cycle** is a period of macroeconomic expansion followed by a period of macroeconomic contractions
 * Business cycle are not minor ups and downs, they are major changes in real GDP above or below normal levels
 * typical business cycle consists of four phases: expansions, peak, contraction, and trough
 * **Expansions**- is a period of economic growth as measured by a rise in real GDP
 * **Economic Growth**- is a steady long term increase in real GDP, in the expansion phase the economy as a whole enjoys plentiful jobs, falling unemployment rate, and business prosperity
 * **Peak** is when GDP stops rising, the height of an economic expansion
 * **Contractions**- After reaching its peak, the economy enters a period of contraction, an economic decline marked by falling real GDP, this causes unemployment to rise
 * **Trough**- When the economy has "bottomed out", the lowest point in an economic contractions, when real GDP stops falling
 * during the contractions phase, GDP is always falling
 * Economists created terms to describe the contractions with different characteristics and levels of severity
 * **Recession**- is a prolonged economic contractions, if real GDP falls for two or more consecutive quarters, the economy is said to be in a recession
 * **Depression**- If a recession is especially long and severe, this causes HIGH unemployment and low factory output
 * **Stagflation-** this term combines stagnant a word meaning unmoving or decayed and inflation, stagflation is decline in real GDP (output) combined with a rise in the price lever (inflation)
 * What Keeps a Business Cycle going?**
 * many things cause a shift in a business cycle, some more predictable than others
 * often 2 or more factors will combine to push the economy to the next phase of a business cycle
 * typically a sharp rise or drop in some inportant economic varibale will set off a series of events that bring about the next phase
 * bsuiness cycles are affected by 4 main economic variables, bsuiness ivenstment, interest rates & credits, consumer expectations, external shocks
 * Business Investments**
 * when the economy is expanding firms expect sales and profits to keeps rising
 * therefore, they may invest in new things or old things to improve them
 * this creates additional output and jobs, helping increase GDP and maintain expansion
 * at some point though, firms may decide that they have expanded enough or that the demand for their product is dropping
 * As a result they cut back on spending as a result demand falls
 * the drop in business spending reduces output and income in other sectors of the economy
 * the industries that produce capital goods slow production down and begin to lay off workers
 * other industies might follow, causing unemployment to rise
 * downward spiral pick up speed and we find ourselves in a recession
 * Interest Rates & Credit**
 * In the US economy, consumers often use credit to purchase "big ticket" items
 * cost of credit is interest rate that financial institutions charge their customers
 * If interest rate rises, consumers are less likely to purchase "big ticket" items
 * Bsuinesse, too, look to interest rates in deciding whether or not to purchase new equipment, expanding their facilities, or make any other large investments that must be finances
 * for businesses, interest rates are a part of opportunity cost of investments
 * when interest rates are low, companies borrow money to make new investments, often adding jobs to the economy, the opposite happens when interest rates climb
 * Consumer Expectations**
 * Consumer spending is determined partly by consumers' expectations
 * fears of a weakening economy can cause consumer confidence to fall meaning that a majority of people expect the economy to being contracting
 * If this happens consumers begin to "save for a rainy day" for fear of layoffs and lower incomes
 * The reduction of spending can actually help bring on a contraction, as firms respond to reduced demand for their products which makes consumer expectations a self-fulfilling prophecy
 * External Shocks**
 * Of all the factors that affect the business cycle, perhaps most difficult to predict are external shocks, which is something that dramatically affects and economy's aggregate supply
 * Examples of negative external shocks are, oil, wars that interupt normal trading relations, droughts
 * When a external shock happens GDP declines and price levels rise, in costs of production and prices of final goods
 * there are also positive external shocks to its aggregate supply
 * For example a discovery of a large amount of oil or minerals will contribute to the nations's wealth
 * Business Cycle Forecasting**
 * to predict the next phase of a business cycle, forecasters must anticipate movements in real GDP, before they occur
 * given the large number of factors that influence the level of output on a modern economy
 * Government and business decisions must be accurate economic predicitons to respond to changes in a business cycle
 * If businesses expect a contraction, they may reduce inventories and postpone building new factories
 * if government policy makers predict a contraction they launch spending and taxation measures to prevent a recession
 * Economists have many tools available for making these predictions
 * **Leading Indicators**- are a set of key economic variables that economists use to predict a new phase of a business cycle
 * the stock market is a leading indicator, typically the stock market turns sharply downward before a recession begins
 * Interest rates are another indicator, short term interest rates show the cost of borrowing money for a few days or months
 * Questions**
 * 1) A contractions can lead an economy to a recession because it brings high unemployment and a decline in real GDP.
 * 2) Interest rates can push a business into a contraction because if the interest rate is high and they do not have the money to pay it off they begin to get in debt.
 * 3) The stock market is considered a leading indicator of economic change because it shows whether stocks are high or low, and this allows you to know if businesses are thriving or declining.
 * 4) The Great Depression affected economists' beliefs because it spread throughout the world and John Maynard Keynes's book pushed economists to consider the idea that modern market economies could fall into long-lasting contractions.
 * 5) I would prefer to be at the trough because one could learn from the mistakes that were made to get this point and when the economy hits a peak again I will be prepaired.
 * 6) Graph