THE BUSINESS CYCLE

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THE BUSINESS CYCLE
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• The Business Cycle
• the recurring and fluctuating levels of
  economic activity that an economy experiences
  over a long period of time
• (www.investopedia.com)
• To recur to happen all over again
• To fluctuate to vary, to change
• Output - production

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What happens in a BOOM?

• Businesses produce more goods
• Businesses invest more in machinery
• Consumers spend more money
• Less money is spent by the Government on
  unemployment benefits
• More money is collected by the government in
  income tax and VAT
• Prices tend to increase due to extra demand
• Level of investment increases
• As a result the level of employment, incomes and
  trade rise
• There is overall prosperity

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What causes RECESSION?

• Decrease in spending by consumers due to lack of
  faith in the economy.
• ?
• Less consumption would mean decline in demand for
  products.
• ?
• Which leads manufacturers to cut down on
  production.
• ?
• Lower production would lead to job cuts.
• ?
• Which leads to high levels of unemployment.
• ?
• Which perpetuates the cycle due to limited
  spending.

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• WHAT HAPPENS IN A BOOM?

• WHAT HAPPENS IN RECESSION?

• Businesses produce more goods
• Businesses invest more in machinery
• Consumers spend more money
• Less money is spent by the Government on
  unemployment benefits
• More money is collected by the government in
  income tax and VAT
• Prices tend to increase due to extra demand

• Business cut back on production
• Some businesses may go bankrupt
• Consumers spend less money
• Individuals may lose their jobs
• More money is spent by the Govt on unemployment
  benefits
• Less money is collected by the Govt in income tax
  and VAT
• Prices start to fall

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LEAD-IN p. 114VOCABULARY 1 p.114

• MATCH.
• growth
• peak
• recession
• trough /tr?f/
• RECESSION ? A DOWNTURN THAT LASTS MORE THAN SIX
  MONTHS
• DEPRESSION OR SLUMP ? A DOWNTURN THAT LASTS FOR A
  YEAR OR TWO

• contraction /k?ntræk??n/, downturn
• expansion, upturn
• bottom
• top

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• Watch and fill in the missing words.
• http//www.youtube.com/watch?vEMHkiKxtlvw

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ECONOMIC TRENDS IN RECESSION

• RECESSION

• EXPANSION

• Economic activity slows down
• Consumers spend less money
• Businesses make fewer sales
• Inventories build up
• Companies earn less revenue
• Fewer orders are placed
• Businesses cut back on output
• Unemployment rate goes up
• Businesses reduce the number of people on
  payrolls
• Finally it reaches a trough

• Economic activity picks up again
• Sales improve
• Excess inventories are used up
• New orders are placed
• Production is ramped up again
• Job opportunities improve
• Unemployment rate comes down
• Finally it tops out

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• Translate parts of the sentences using new
  collocations
• Economic activities se usporavaju.
• Višak zaliha je used up.
• Fewer se narucuje.
• Firme smanjuju on output.
• Stopa nezaposlenosti goes up.
• Businesses reduce broj ljudi na platnom spisku.
• Production se opet potice.
• Finally it dosegne najnižu tocku ekonomskog
  ciklusa.

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V, U or W - shaped RECESSION????
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• U SHAPED RECESSION
• Slowdown lingers and the recovery is delayed

• V SHAPED RECESSION
• Bottoms out and rebounds quickly

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INTERNAL (ENDOGENOUS) THEORY

• GOOD PERIOD ( BOOM)
• People spend
• People run up debts
• DOWNTURN (RECESSION)
• Debts have to be paid
• Demand decreases
• Interest rates rise which means more to pay on
  mortgage or rent
• People fearing the possibility of losing their
  jobs start saving money and consume less and
  consequently there is a fall of demand and fall
  in production and employment

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EXTERNAL (EXOGENUOUS) THEORIES

• Causes are outside economic activity
• scientific advances
• natural disasters
• elections or political schocks
• demographic changes
• technological inventions (steam engines,
  railways, automobiles, electricity, microchips)
  which lead to periods of creative destruction

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• TRUE OR FALSE Reading MK. p. 114-115
• During a downturn, parts of the economy expand to
  the point where they are working at full
  capacity.
• A long period of contraction is called a boom.
• A downturn that lasts more than six months is
  called a slump.
• People tend to spend less when the economic times
  are good and when they feel confident about the
  future.
• When interest rates rise people find themselves
  paying more than they anticipated on their
  mortgage and rent.
• Companies only invest when demand is falling.
• If demand exceeds supply, prices should fall and
  encourage people to start spending more.
• Creative destruction means that radical
  innovations may destroy established companies or
  industries.

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• Key
• An upturn
• Expansion
• A recession
• Spend more
• True
• Demand is growing
• Supply exceeds demand
• true

16
Match up the words with similar meaning

• Boom
• Decrease
• Depression
• Excess
• Expand
• Expenditure
• Output
• recovery

• Slump
• Spending
• Grow
• Stimulate
• Upturn
• Production
• Surplus
• reduce

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• KEY
• Boost - stimulate
• Decrease reduce
• Depression slump
• Excess surplus
• Expand grow
• Expenditure spending
• Output production
• Recovery - upturn

18
Match up the words with opposite meaning

• Boom
• Contract
• Demand
• Endogenous
• Peak
• save

• Trough
• Expand
• Spend
• Depression
• Supply
• exogenuous

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• KEY
• Boom depression
• Contract expand
• Demand supply
• Endogenuous exogenuous
• Peak trough
• Save - spend

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GOVERNMENT AND THE BUSINESS CYCLE

• In order to prevent the economy from running too
  hot (inflation) or too cold (recession,
  depression), the government often becomes
  involved in efforts to try and stabilize the
  economy.
• The government has two major tools to try and
  stabilize the economy and achieve its goals
• Fiscal policy and monetary policy.

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MONETARY POLICY

• There is a relationship between the amount of
  money in the economy (the money supply) and the
  level of business activity. If the money supply
  increases, consumers spending will increase,
  promoting growth. If the money supply decreases,
  the economy is likely to contract.

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MONETARY POLICY

• The government, through the Central bank, can
  regulate the money supply to attemt to promote or
  inhibit economic activity.
• What the central bank does most often is raise
  (to slow down) or lower (to speed the economy up)
  interest rates.

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FISCAL POLICY

• Fiscal policy is the taxing and spending
  decisions that are made by the government.
• Fiscal policy actions of the government fall into
  two general categories
• Raise or lower taxes
• Increase or decrease government spending

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• John Maynard Keynes (1883-1946)
• The most influential economist of the mid-20th
  century
• A school of economic thought named after him?
  Keynesian or Keynesianism
• His ideas about government intervention in the
  economy, and the use of fiscal and monetary
  measures to diminish the effects of economic
  recessions and periods of high unemployment, were
  put into practice by many major Western economies
  shortly before the end of the Great Depression in
  the 1930s
• Keynes argued against the traditional view that
  the free markets would automatically provide full
  employment as long as workers reduced their wage
  demands
• Keynesian economic policies were widely adopted
  in the 1950s and 60s

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• In 1971 the Republican US President Richard Nixon
  famously said We are all Keynesians now but by
  the end of the 1970s, the monetarist argument
  that Keynesian policies ineviably lead to
  inflation had become dominant
• Keynesianism made a dramatic return in the crisis
  of 2008