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1 Macroeconomics LESSON 7 The Business Cycle: Introduction to Macroeconomic Indicators Introduction and Description Procedure The study and control of business cycles are the heart of macroeconomics. Business cycles are a problem because output fluctuations lead to unemployment and inflation. 1. Discuss what students have seen, heard, or experienced that leads them to think the economy is doing well or poorly. Make sure unemployment and inflation are included in the discussion. Current data for unemployment and inflation are available on the Bureau of Labor Statistics Web site: www.bls.gov. Objectives 1. Understand that the business cycle is made up of ups and downs in the economy. 2. Define the phases of the business cycle. 3. Understand the general meaning of the terms unemployment, inflation, recession, depression, peak, trough, expansion, contraction, and recovery. More detailed understanding and definitions are included in lessons in later units. Time Required One class period or 45 minutes Materials 1. Activity 1-10 2. Visual 1-11 Bell Ringer Ask students how they think the economy is doing right now—is it “up” or “down”? You can get an idea of where the economy is (i.e., the phase of the business cycle) at http://www.nber.org/cycles.html, the Web site of the organization that dates U.S. business cycles. 2. Explain that the economy experiences ups and downs over time. The business cycle represents these economic fluctuations. The current state of the economy reflects the phase of the business cycle the economy is in. Show the business cycle Visual 1-11. 3. Use Visual 1-11 to discuss the phases of the business cycle. Recession is defined as two consecutive quarters (six months) of negative growth in real GDP. A severe recession is called a depression, but there is no specific definition of a depression. The point after which output starts to decline is called the peak of the business cycle, or the beginning of a recession. The point after which output starts to increase is called the trough of the business cycle. After the trough of the business cycle, the economy goes into a recovery period. The period between the trough and the next peak is called an expansion. 4. Business cycles are defined in terms of output; however, other variables follow the movement of output. The unemployment rate rises during recessions and falls during expansions. During a rapid expansion, the economy may experience inflation. Advanced Placement Economics Macroeconomics: Teacher Resource Manual © Council for Economic Education, New York, N.Y. 33 Purchase your 4th Edition AP Microeconomics and Macroeconomics Teacher Resources and Student workbooks today! CEE-APE_MACROSE-12-0101-MATM-Book.indb 33 29/04/14 7:59 PM 1 Macroeconomics 5. Emphasize these points about business cycles: ■■ There is no consistent length of time for each phase. ■■ Business cycles are difficult to predict. ■■ We are only certain about the phase of the business cycle in hindsight. That 34 LESSON 7 (CONTINUED) is, we can’t tell when the economy has reached a peak until after it starts downward, and we can’t tell when it has reached a trough until after it starts upward. 6. Have students complete Activity 1-10, and review the answers with students. Advanced Placement Economics Macroeconomics: Teacher Resource Manual © Council for Economic Education, New York, N.Y. Purchase your 4th Edition AP Microeconomics and Macroeconomics Teacher Resources and Student workbooks today! CEE-APE_MACROSE-12-0101-MATM-Book.indb 34 29/04/14 7:59 PM 1 Macroeconomics VISUAL 1-11 Phases of the Business Cycle Peak Contractionary (Recession) Expansionary (Recovery) REAL GDP Expansionary (Recovery) DP n re -r ng Lo t un f do G al re Trough PERIODS OF TIME Advanced Placement Economics Macroeconomics: Teacher Resource Manual © Council for Economic Education, New York, N.Y. 35 Purchase your 4th Edition AP Microeconomics and Macroeconomics Teacher Resources and Student workbooks today! CEE-APE_MACROSE-12-0101-MATM-Book.indb 35 29/04/14 7:59 PM