Economic Instability Business Cycles and Fluctuations

OPENER: During The Great De ression: GDP dro ed !"# $nem loyment reached %!# &ages lummeted Ban's (ailed

The im act o( )merica*s Great De ression +as both ro(ound and +orld +ide, It de-astated Canada*s economy .though their ban's did not (ail/0 a((ected 1atin )merica0 2outh )(rica0 and Euro e 3 es ecially Germany, The economic crisis in Germany*s &eimar Re ublic . re4Na5i/ +as so se-ere .debts both o+ed to and by $,2, interests/ that some historians argue that the De ression hel ed (acilitate 6itler*s rise to o+er,

1. Business Cycles in the United States: a. The Business Cycle consists of two phases: i. Expansion 1. The average expansion in the U.S. has lasted 4 !onths and increased output "y ##.$ percent. ii. %ecession: 1. The average recession has lasted 1$ !onths and reduced output "y &.' percent. ". %ecessions (also )nown as contraction* "egin with a pea)+ and end with a trough.

c. Expansion is a recovery fro! a recession. d. ,f and when a recession "eco!es very severe+ it can turn into a depression. e. The worst -epression in US history was the .reat -epression+ which "egan in 1/#/.

i. C0USES 12 .%E0T -E3%ESS,14: 1. Dis arity in the distribution o( income 5 the Great Gatsby effect. 0!erica did not really have a !iddle class. ,t was split up into the very poor and the very rich. a. The poor could not sti!ulate the econo!y with consu!er spending+ "ecause they had very little or no !oney to spend. ". The rich had the !oney+ "ut didn6t use it in ways to spar) econo!ic growth. They either saved it in "an)s or used it to speculate on the stoc) !ar)et. %, Easy and Plenti(ul credit a. 7any people "orrowed heavily in the 1/#8s 5 !ore than they could afford to pay "ac). 9igh interests rates and "usiness fluctuations also i!pacted this. 7, Global Economic Conditions: a. Europe was still recovering fro! a !assive war (::,*. 0 good deal of ara"le (far!a"le* land had "een deci!ated "y trench warfare. ". -uring the 1/#8s+ "an)s+ "usinesses and pu"lic institutions !ade tons of loans to foreign co!panies+ interests and nations to help support "usiness and international trade. c. :hen the -epression "egan+ these co!panies pulled their loans 5 or called in their de"ts. This left these foreign interests "ro)e. 0s a result+ they didn6t have any !oney to "uy 0!erican goods 5 resulting in a huge drop in 0!erican exports. This+ in turn+ led to 0!erican ;o" losses. d. 9igh 0!erican tariffs !ade foreign good too expensive for 0!ericans to "uy. 0s a result+ the exporters lost "usiness+ !oney+ and fell further into econo!ic disaster. ii. So!e .overn!ental policies "y 2-% and ::,, eventually "ails US out of -epression. f. Since the .reat -epression+ the US has experienced several recessions+ "ut each was short co!pared with the recovery that followed.

g, D$RING ) DEPRE22ION: Production slo+s0 out ut declines0 unem loyment rises0 standard o( li-ing (alls,

,,. Causes of the Business Cycle: 0. Businesses reduce their capital expenditures once they decide they have expanded enough. B. Businesses cut "ac) their inventories at the first sign of an econo!ic slowdown. a. (as) follow<up Supply=de!and >uestion here*. C. Businesses cut "ac) on invest!ent after an innovation ta)es hold. -. Tight !oney policies of the 2ederal %eserve Syste! slow the econo!y. E. External shoc)s can cause "usiness cycles: a. ,ncrease in oil prices. ". :ars c. 4atural disasters. F, Forecasting Business Cycles: a, The inde8 o( leading indicators is a monthly statistical series that hel s economists redict the direction o( (uture economic acti-ity, i, No one statistic is com letely reliable0 so economists use a com osite o( many,

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