The Business Cycle worksheet

Economics
The Business Cycle
Reading and Questions
Rocklin High School
Excerpted from naked economics, UNDRESSING THE DISMAL SCIENCE, By Charles
Wheelan,2002,
After reading the article, answer the following questions on binder paper. Head it “The
Business Cycle reading and questions” and include it with your Unit 3 packet.
1. How can a recession be good for the economy?
2. How does a recession in one country “spread” to other countries?
3. What role is the government expected to take in smoothing out the business
cycle? Give at least two examples.
II. Notes on Business Cycle from class lectures:
1. Definition:
2. Phases:
3. Causes in change in direction
4. Definition of a recession:
5. Draw the business cycle below and label.

Economics
Rocklin High School
Every four years men from far and wide cast their hats into the national ring of electoral
politics and compete for the job of President of the United States of America. Each time
this process occurs the nation appears to go through serious soul searching. We
debate, we poll, we campaign and we fund raise. In November the American people,
after listening to this great public discourse (please note my sarcasm here!), elect a
President. Well, some will say the most important issue may be foreign policy or
character or the amount of money in a candidate war chest but there is really only one
thing that most Americans really care about... the economy.
If history tells us anything it is that when times are good political parties and candidates
stand a very good chance of being reelected and when times are bad the incumbent
had better start packing his bags for whatever state he came from. Hearken back to the
immortal words spoken by then candidate William Jefferson Clinton in a debate versus
incumbent George Herbert Walker Bush when asked what the most important issue in
the election was: "It's the economy, stupid." Clinton had his finger on the pulse of the
nation (no pun intended), Bush did not and thus Bush lost.
While presidents appear to take much of the blame and accolades for the success and
failure of the economy, this is not quite fair. History shows us that the economy is
cyclical in nature. Take a look at the chart below as an example of the ups and downs of
the American economy.
As you can see by even a cursory examination of the graph there have been periods of
great productivity as well as growth. In general you can note that we have had our ups
and downs. I am sure what jumps out at you is the Great Depression. This chart really
shows how low productivity really was and how little spending was going on. Of course
this was followed by huge government spending on World War II that essentially got us
out of the Depression.
Further examination notes that almost every time there is a war, our economy's
productivity and spending go up to correspond to the wartime spending. You can also
note typical post war declines.
You should also pay attention to the longest period of continued economic growth and
prosperity. My interpretation shows either W.W.II or Vietnam as the longest sustained
growth and that was buoyed by wartime spending. Either way the longest period would
be 2 to 4 years tops. Now figure this, since 1992, the end of the graph, our production

Economics
Rocklin High School
has risen every year. That puts us smack in the middle of the longest period of
sustained economic growth in our nation’s history. It’s now 9 years and shows no
immediate signs of slowing down. History and graphs tell us, however, that it has to end
sometime; the question is... when?
THE PHASES OF THE BUSINESS CYCLE
Economists have certain ways of labeling the business cycle. The business cycle may
be defined as the changes that occur to the real GDP because of alternating periods of
expansion and contraction. The phases are:
1. Recession. A decline in the real GDP that occurs for at least two or more quarters.
Recessions feed on themselves. During a recession, business people spend less than
they once did. Because sales are failing, businesses do what they can to reduce their
spending. They lay off workers, buy less merchandise, and postpone plans to expand.
When this happens, business suppliers do what they can to protect themselves. They
too lay off workers and reduce spending.
As workers earn less, they spend less, and business income and profits decline still
more. Businesses spend even less than before and lay off still more workers. The
economy continues to slide.
2. Low Point, or Depression. State of the economy where there are large
unemployment rates, a decline in annual income, and overproduction. The time at which
the real GDP stops its decline and starts expanding; the lowest point. Sooner or later,
the recession will reach the bottom of the business cycle. How long the cycle will remain
at this low point varies from a matter of weeks to many months. During some
depressions, such as the one in the 1930s, the low point has lasted for years.
3. Expansion and Recovery. A period in which the real GDP grows; recovery from a
recession. When business begins to improve a bit, firms will hire a few more workers
and increase their orders of materials from their suppliers. Increased orders lead other
firms to increase production and rehire workers. More employment leads to more
consumer spending, further business activity, and still more jobs. Economists describe
this upturn in the business cycle as a period of expansion and recovery.
4. Peak. The point at which the real GDP stops increasing and begins its decline; the
highest point. At the top, or peak, of the business cycle, business expansion ends its
upward climb. Employment, consumer spending, and production hit their highest levels.
A peak, like a depression, can last for a short or long period of time. When the peak
lasts for a long time, we are in a period of prosperity.
One of the dangers of peak periods is that of inflation. During periods of inflation, prices
rise and the value of money declines. Inflation is more of a threat during peak periods
because employment and earnings are at high levels. With more money in their
pockets, people are willing to spend more than before. In this way, demand is increased
and prices rise.