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1 Objectives After completing this lesson, you will be able to: describe the phases of the business cycle define GDP, inflation, contraction, trough, recession, growth, unemployment, and peak What a Ride! Have you ever ridden a roller coaster? Watch the video below to experience a roller coaster ride What a Ride Text Version Caption reads, "Expansion." The journey begins with the steep incline of the roller coaster. At the top of the incline you almost think you are going to soar into the air. A caption reads, "Peak." The ride brings you through some twists and turns, then you begin a steep decent downwards. The caption reads, "Contraction." Then you go through more peaks, twists, and decents as you finish the ride. Caption reads, "Trough. " Show Video A roller coaster ride contains a series of "ups" and "downs" just like the economy. In this lesson, you will examine the phases of the business cycle and learn the economic terms that relate to the business cycle. You will use what you learn to complete a brief quiz. Unless Otherwise Noted All Content 2020 Florida Virtual School 1/1

2 The Aggregate Economy The graph of a business cycle looks like a roller coaster. However, take note of a key difference. A roller coaster's first peak is usually the highest; the business cycle usually peaks at higher and higher levels as the economy grows. Many economists consider the business cycle an obsolete idea because government regulation helps prevent extreme waves of growth and decline. When we discuss the business cycle we are looking at the aggregate economy. This is the total of all economic activity in the country. One important measure of the aggregate economy is a country's gross national product (GNP), or the total value of goods and services its companies produce. Examine the information below to learn a bit more about GNP and other measures of the aggregate economy. Factors Affecting GNP Other Aggregates A country's GNP is considered by many economists to be the most important measure of a country's economic health. Many factors can affect a nation's gross national product: Population expansion or contraction Population growth in a country can potentially drive up both the GNP and per capita GNP, especially in industrialized countries. More people can produce more goods and services. Entrepreneurism Creation of new goods and services can lead to huge expansion in the GNP. For example, consider how technological developments in recent years have resulted in more goods and services produced. Trade Increased trade can also increase GNP. For example, Japan was an isolated country prior to World War II. After the war, Japan opened up its borders and became a huge trading partner for western countries. This led to a large jump in Japan's GNP. War When countries are involved in wars, it can destroy their infrastructure and drive down their GNP. However, for countries who supply military arms, war can have a positive effect on the GNP. Natural Resources Discovery of new natural resources can positively impact a country's GDP. For example, when oil was discovered in the Middle East, the GNPs of oil-producing nations increased significantly. On the other hand, depletion of an important natural resource could negatively impact a country's GNP. Phases of the Business Cycle Let's examine the phases of the business cycle where these terms relate to each other. Be sure to take notes here. You will be asked to identify the characteristics of each stage in the business cycle. 1/2

3 04.01 The Business Cycle: What a Roller Coaster! Text Version This animation uses the metaphor of a roller coaster to explain the business cycle. An image of a roller coaster track overlaid onto a business cycle graph is repeated throughout the slides. Time is plotted along the X-axis and economic activity is plotted along the Y-axis. A series of points (A, B, C, D) are connected to form a wave that rises, peaks and then falls. The points repeat over time to form yet another wave, plotted higher along the Y-axis to indicate an upward direction in economic activity. In the animation, a roller coaster cart moves from one point to the next, adding sound effects of the tracks and screaming when the cart drops. The text corresponding to the point being viewed is highlighted in the legend on the right hand side. Slide 1: The Business Cycle: What a Roller Coaster! Slide 2: The business cycle can be compared to a roller coaster. There are many ups and downs! Move through the slides to learn more about each point in the business cycle. ( i = inflation) ( u = unemployment) Slide 3: A = expansion During the expansion phase, Gross Domestic Product, or GDP, is increasing. Usually, this also means that the rate of inflation is increasing while the unemployment rate is decreasing. (The roller coaster cart moves to point A on the track.) Slide 4: B = peak The peak is the turning point, where production reaches the highest current level. The peak represents an excellent time for business; however, it also represents the start of the contraction phase. (The roller coaster cart moves to point B on the track.) Slide 5: C= contraction During a contraction, the unemployment rate is increasing while the rate of inflation is decreasing. We call a period of falling prices "deflation." (The roller coaster cart moves to point C on the track.) Slide 6: D = trough People typically refer to a contraction as a "recession," and we call a severe contraction a "depression." The trough is the opposite of a peak. The trough is the transition from a contraction to an expansion phase and thus the worst point in a period of decline. Each full cycle of the phases typically lasts between three to five years. (The roller coaster cart moves to point D on the track.) Slide 7: Wanna see it again? Unless Otherwise Noted All Content 2020 Florida Virtual School 2/2

4 Debating Government Intervention 2009 Jupiterimages Corporation During the Great Depression of the 1930s, the contraction phase was so severe that Americans demanded government help. Debate still rages today over the efficacy of Roosevelt's "New Deal" programs. Yet since that time, Americans have accepted more government intervention. Regulation aims to prevent wild swings in the business cycle. It helps make the peaks and troughs more like the highs and lows of the mild roller coaster in the toddler section of a theme park than the extreme highs and lows of other more terrifying coasters. However, remember that economics depends on human behavior and is, therefore, not entirely predictable. For example, economists still debate the causes of a strange 1970s business cycle. During that time, high inflation coexisted with high unemployment rates. As you saw in the business cycle image, this is not typical. Economists named the odd pattern stagflation. Common Cents The purpose of government regulation is to promote growth and prevent wild swings in the economy. Review Now let's check to see how much information you recall from this lesson Examples from the Real World Selfcheck Text Version Instructions: Examine the scenarios, then choose the economic climate it best represents from these two options - contraction or expansion. Slide One: Image: Photograph of four middle-aged women. Audio: "You won't believe it! Nearly six hundred unemployment claims in just one month, and I live in a 1/2

5 small town! I have worked at this unemployment office for over five years and have never seen this many forms come through in such a short period of time. It's a sign of the times, I suppose. I just hope we see some improvement soon, too many people are out of work." Slide Two: Image: Photographs of cropped family and "for sale" sign with "sold" on top. Audio: "My house has been on the market for a year; we are so eager to sell. I dropped my asking price and now finally I am receiving calls. I have an open house this weekend. My realtor says unemployment is down two percent and with more people working I should expect more and more interested buyers in the coming weeks, especially since home sales are up 30% over this time last year." Slide Three: Image: Photograph of car windshield. Audio: "The business is really tough right now. I've only sold four used vehicles over the past two weeks, and no new vehicles at all. I've been a manager at Automall for three years and sales have been declining steadily in the past few months. Part of the problem is banks are not approving loans for my customers, so they have to walk away without a vehicle. I expect things to get worse before they get better." Slide Four: Image: Photograph of man and older waitress. Audio: "I've never earned better tips! I've been a waitress for two years now and the past few months my earnings have been increasing more and more. It's not only that people are more generous; I've been busier than ever before. Usually Tuesday nights are really slow but now even Tuesday nights I always have at least two tables going until we close! Since we're doing so much better, my manager says we might open another restaurant in the next town over." Unless Otherwise Noted All Content 2020 Florida Virtual School 2/2

6 Lesson Summary A business cycle is similar to the movement of a roller coaster. One of the four phases of the business cycle is expansion, like the upward climb of the roller coaster. The momentary pause at the summit is the peak. Then the contraction phase begins, similar to the downslide of your cart. Finally, the trough is the lowest point of the roller coaster ride and of the business cycle. Practice Review the vocabulary presented in this lesson. Fill in the blanks on the diagram and sentences below to see how well you understand the Ultimate Roller Coaster, also known as the business cycle! Fill in the Blank Self-check Text Version Image shows a business cycle graph with blanks for each of the four corresponding stages. Type in the correct label for each stage in the graph. Possible labels include: contraction, peak, rises, falls, expansion, trough 1. Rising slope: 2. Highest point: 3. Downward slope: 4. Lowest point: During expansion, unemployment while inflation. During a contraction, unemployment while inflation. s Quiz You should be comfortable now with the phases of the business cycle. You will use what you have learned to complete a brief quiz on the information from the lesson. 1/2

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