Chapter+12.2+Notes

**Key Terms** Business Cycle : a period of macroeconomic expansion followed by a period of contraction Expansion : a period of economic growth as measured by a rise in real GDP Economic Growth : a steady, long term increase in real GDP Peak : the height of an economic expansion, when real GDP stops rising Contraction : a period of economic decline marked by falling real GDP Trough : the lowest point in an economic contraction, when real GDP stops falling Recession : a prolonged economic contraction Depression : a recession that is especially long and severe Stagflation : a decline in real GDP combined with a rise in the price level Leading Indicators : key economic variables that economists use to predict a new phase of business cycle
 * Chapter 12.2 Notes**

1. Expansion - period of economic growth as measured by a rise in real GDP 2. Peak - when real GDP stops rising 3. Contraction - economic decline after the peak, marked by falling real GDP -recession - depression - stagflation 4. Trough - when the economy has "bottomed out", reached the lowest point in economic contraction
 * Phases of a Business Cycle **

**What Keeps a Business Cycle Going?** 1. business investment - investment spending creates additional output and jobs, helping to increase GDP and maintain the expansion 2. interest rates and credit - cost of credit is the interest rate institutions charge the customers 3. consumer expectations - consumer spending is determined by consumer's expectations 4. external shocks - difficult to predict, dramatically affect an economy's aggregate supply

**Business Cycle Forecasting** - leading indicators: set key economic variables that economic variables that economists use to predict a new phase of a business cycle - difficult to predict changes in the business cycle

**Business Cycles in American History** The Great Depression - stock market crashed in 1929 - between 1929 and 1933 GDP fell by almost 1/3, and unemployment rose to about 25%

-1970s an international cartel of petroleum exporting quadrupled the price of its oil after sending an embargo to the US
 * Some Later Recessions **

- after a brief recession in 1991 the US economy grew each year during the 1990s
 * The Business Cycle Today **

1. Which phrase of a business cycle can lead an economy into recession? - external shocks 2. How can interest rates push a business cycle into a contraction? - if consumers decide not to buy something because the interest rates are too high it can cause the GDP to fall 3. Why is the stock market considered to be a leading indicator of economic change? - economists can use the stock market as a leading indicator because they use it to predict new phases in the business cycle 4. How did the Great Depression affect economists' beliefs about the macroeconomy? - the macroeconomy was effected during the Great Depression when they had thought it wouldn't be affected 5. At which point in a business cycle would you prefer to be, the peak or trough? Why? - the trough, because if it's at the trough it has a bigger chance to rise and if it's at the peak, that's the highest it would go and after the peak it begins to decrease
 * Chapter 12.2 Assessment**