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Eco 13/4
Business Fluctuations
 Each year there are ups and downs in
unemployment, world trade, inflation,
 These are called business
fluctuations or the business cycle.
Model of the Business
 Growth leads to economic peak
 Boom is a period of prosperity- new
businesses are opening, factories are
producing at full capacity, near 100%
Model of the Business
 Eventually, real GDP levels off and
begins to decline.
 A contraction of the economy occurs.
Business activity slows down.
 If the contraction lasts long enough
and is deep enough, it slips into a
 Any period of at least two quarterssix months- during which real GDP
does not grow.
 Business activity starts to fall fast
economy-wide. Factories cut
production and lay off workers.
 Consumers cut back on purchases.
 Millions are unemployed, many
businesses fail, economy operates far
below capacity.
 Downward direction of the economy
levels off. Trough is the lowest point.
 Business activity begins to increase,
beginning a period of expansion, or
 Consumer spending picks up, signaling
factories to hire workers and increase
production to meet demand. Continues
until another peak.
Ups and Downs of Business
 See 13.12 on p. 362