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THE BUSINESS CYCLE
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
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
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.
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
LEAD-IN p. 114
VOCABULARY 1 p.114
MATCH.
1.growth
2.peak
3.recession
4.trough /trɔf/
• contraction /kən’trækʃən/,
downturn
• expansion, upturn
• bottom
• top
RECESSION → A DOWNTURN THAT LASTS MORE THAN SIX MONTHS
DEPRESSION OR SLUMP → A DOWNTURN THAT LASTS FOR A YEAR
OR TWO
• Watch and fill in the missing words.
• http://www.youtube.com/watch?v=EMHkiKxtl
vw
ECONOMIC TRENDS IN RECESSION
RECESSION
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
EXPANSION
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
Translate parts of the sentences using new
collocations:
1.Economic activities se usporavaju.
2.Višak zaliha je used up.
3.Fewer se naručuje.
4.Firme smanjuju on output.
5.Stopa nezaposlenosti goes up.
6.Businesses reduce broj ljudi na platnom spisku.
7.Production se opet potiče.
8.Finally it dosegne najnižu točku ekonomskog ciklusa.
V, U or W - shaped RECESSION????
U – SHAPED RECESSION
Slowdown lingers and the
recovery is delayed
V –SHAPED RECESSION
Bottoms out and rebounds
quickly
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
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”
• TRUE OR FALSE
Reading MK. p. 114-115
1. During a downturn, parts of the economy expand to the point
where they are working at full capacity.
2. A long period of contraction is called a boom.
3. A downturn that lasts more than six months is called a slump.
4. People tend to spend less when the economic times are good
and when they feel confident about the future.
5. When interest rates rise people find themselves paying more
than they anticipated on their mortgage and rent.
6. Companies only invest when demand is falling.
7. If demand exceeds supply, prices should fall and encourage
people to start spending more.
8. Creative destruction means that radical innovations may
destroy established companies or industries.
• Key:
1. An upturn
2. Expansion
3. A recession
4. Spend more
5. True
6. Demand is growing
7. Supply exceeds demand
8. true
Match up the words with similar meaning:
•
•
•
•
•
•
•
•
Boom
Decrease
Depression
Excess
Expand
Expenditure
Output
recovery
•
•
•
•
•
•
•
•
Slump
Spending
Grow
Stimulate
Upturn
Production
Surplus
reduce
•
•
•
•
•
•
•
•
•
KEY
Boost - stimulate
Decrease – reduce
Depression – slump
Excess – surplus
Expand – grow
Expenditure – spending
Output – production
Recovery - upturn
Match up the words with opposite
meaning:
•
•
•
•
•
•
Boom
Contract
Demand
Endogenous
Peak
save
•
•
•
•
•
•
Trough
Expand
Spend
Depression
Supply
exogenuous
•
•
•
•
•
•
•
KEY
Boom – depression
Contract – expand
Demand – supply
Endogenuous – exogenuous
Peak – trough
Save - spend
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.
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.
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.
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
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
• 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