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Chapter 3
Economic
Activity in a
Changing World
Section 3.2
The Business
Cycle
Read to Learn
Describe the four stages of the business cycle.
Explain how individuals and government
influence the economy.
The Main Idea
In a market economy, there is an economic cycle,
which includes four stages: prosperity, recession,
depression, and recovery. These are also the four
stages of the business cycle. In the last few
decades, we have experienced the economic cycle
a number of times.
Key Concepts
Guiding the Economy
Four Stages of the Business Cycle
Key Terms
business cycle
the rise and fall of economic
activity over time
prosperity
the peak of economic
activity
Key Terms
recession
when economic activity
slows down
depression
a deep recession that affects the
entire economy and lasts for
several years
Key Term
recovery
a rise in business activity after a
recession or depression
Guiding the Economy
Congress and the President enact laws that
impact fiscal policy.
Government expenditures are often planned to
guide the economy.
Guiding the Economy
The Federal Reserve (“the Fed”) is a
government agency that guides the economy.
Graphic Organizer
Guiding the Economy
The Federal Reserve
Regulates the
amount of
money in
circulation
Controls
interest rates
Controls the
amount of
money loaned
State and local governments also take steps to
influence their economies
Four Stages of the Business Cycle
The business cycle of
one country can affect
other trading partners.
business cycle
the rise and fall of
economic activity
Figure 3.1 Business Cycle Model
Prosperity
Prosperity results
from low
unemployment,
high production of
goods and services,
and the opening of
new businesses.
prosperity
a peak of economic
activity
Graphic Organizer
Characteristics of Prosperity
Higher wages
Greater demand for goods to be produced
More people buy houses, which creates work
for builders
People buy more goods from other countries,
which benefits those countries
Recession
During a recession,
businesses produce
less, so they need
fewer workers.
recession
when economic activity
slows down
Graphic Organizer
Characteristics of a Recession
Businesses produce less
Unemployment increases
People have less money to spend
Fewer goods and services are produced
The GDP declines
Recession
A recession in one industry can cause a ripple
effect throughout the entire economy.
Depression
A depression can be
limited to one country
but usually spreads to
related countries.
depression
a deep recession
Graphic Organizer
Characteristics of a Depression
High unemployment
Low production of goods and services
Can last for several years
Spreads to other countries
High number of unused manufacturing facilities
Very rare
Depression
The stock market crash on October 29, 1929,
or “Black Tuesday,” marked the beginning of
the Great Depression.
Graphic Organizer
Unemployment
rose nearly
800 percent
Many banks
around the
country
failed
The
Many towns
The GDP fell
Great
and other civic
nearly 50
Depression
bodies printed
percent
their own
The average
The money
money
manufacturing
supply fell
wage was 5
by one-third
cents an
hour
“Depressionproof”
During the Great Depression, millions of people
lost their homes and livelihoods.
A large percentage of middle-class Americans
were able to keep their jobs. These people were
in professions considered “depressionproof.”
Recovery
Production starts to
increase during a
recovery.
recovery
a rise in business activity
after a recession or
depression
Recovery
Characteristics of a Recovery
People start going back to work
People have money to purchase goods and
services
Demand for goods and services stimulates
more production
New businesses open
Businesses become more innovative
Recovery
In 1939, the United States was beginning to
recover from the depression when World
War II began.
The war increased the rate of recovery
because of the demand for production.
1. What is the stage that follows a recession or
depression?
The recovery stage can happen after either a
recession or a depression.
2. What is the difference between a recession
and a depression?
A recession is a slight downturn; a depression
is a major downturn.
3. Why may innovation play an important role in
the recovery stage of a business cycle?
Innovation creates demand that leads to more
employment and production, which leads to
more demand.
End of
Chapter 3
Economic
Activity in a
Changing World
Section 3.2
The Business
Cycle