Untitled Flashcards Set

Business Cycle: the name for fluctuations in the economy

• Economic activity fluctuates year to year

  • Most years, production of G&S rises

  • For 60 years, U.S. GDP has grown on average of 3% per year

Peak: economy is at its height/ most prosperous

Recession: GDP doesn’t grow for at least 6 months (2 quarters)

Depression: a severe recession, real GDP decreases over 10%

• A depression is avoided in most downturns

Trough: lowest point of a downturn (for a recession/depression)

Expansion/Recovery: real GDP grows

Causes of Fluctuation:

Aggregate Supply: total G&S businesses are willing and able to produce given chances in the price level (overall inc./dec. In prices in the economy)

• Price levels up… aggregate supply up

• Price levels down… aggregate supply down

External Shocks that affect aggregate supply: 

• Weather

  • Good weather = aggregate supply UP

• Price of Oil 

  • Decrease in oil price = aggregate supply UP

• Technological changes

  • more/better tech = aggregate supply UP

Aggregate Demand: total G&S purchased by all sectors of the economy, based on changes in the price level

• Price levels up … aggregate demand down

• Price levels down… aggregate demand up

External Shocks that affect aggregate demand: 

• Household wealth

  • More wealth = aggregate demand UP

• Consumer Confidence

  • Great confidence = aggregate demand UP

• Government policy

  • More money in the economy = aggregate demand UP

Aggregate Demand: causes an EXPANSION 

• AD goes up

• This drives prices up (more people chasing goods…shortage)

• AS goes up due to receiving higher prices for G&S

• Suppliers hire workers to increase AS, giving workers money to spend

• These workers spend their money, increasing AD

• The cycle repeats throughout the economy

Aggregate Demand: causes a RECESSION

• AD goes down

• This drives prices down (less people chasing goods…surplus)

• AS goes down due to receiving lower prices for G&S

• Suppliers lay off workers to decrease AS, giving workers less money to spend

• These workers spend less money, decreasing AD

• The cycle repeats throughout the economy

Characteristics of Fluctuation: 

• Irregular and unpredictable

• Most macroeconomic variables fluctuate together

• Standard of living is impacted by the business cycle

  • A greeted recession, a greater unemployment, lower GDP, lower standard of living