Unit 2 Lesson 3: The Business Cycle

Question 1

List the 4 stages of the business cycle.

Answer 1

1. Expansion
2. Boom/ peak
3. Contraction/ recession
4. Depression/ death

Question 2

By what value the business cycle measured?

Answer 2

Real GDP

Question 3

What are the economic indicators?

Answer 3

1. GDP
2. CPI
3. Inflation
4. Employment

Question 4

What happens during the expansion?

Answer 4

• Rising prices
• Lower unemployment
• Rising production
• Rising incomes

Question 5

What happens during the peak?

Answer 5

• economy stops growing
• maximum gdp reached
• business can’t hire more people or produce more
• cycle enters contraction

Question 6

What occurs during a contraction/ recession?

Answer 6

• •Decreased incomes can lead to decrease in consumer demand for goods and
  services ->shifts aggregate demand to left
  •Revenue of firms will tend to decline
  •Firms may be forced to cut back production in order to control costs; lay off
  workers or go out of business (downward spiral)
  •This called recessionary trend
  •DEF: when real GDP growth is negative or declines for 2 consecutive quarters (2 -3
  month periods)
  •Characterized by increasing levels of real GDP growth, and low levels of inflation
  or even falling prices (deflation)

Question 7

How does a depression occur and what happens?

Answer 7

● Happens if recessionary period is prolonged by aggregate
demand, with very high unemployment and very low
output levels
● Eventually it will fall enough that consumers will begin to
spend again and it will begin to ris

Question 8

Describe the point of the business cycle the “trough”.

Answer 8

When the economic cycle reaches a trough:
● Economy “bottoms-out” (reaches lowest point)
● High unemployment and low spending
● Stock prices drop
● But, when we hit bottom, nowhere to go but up!
● UNLESS….
○ A prolonged contraction is called a recession (contraction for over 6
months)
○ A recession of more than one year is called a depressio