The business cycle

© Mark Johnson,
In Thinking
www.thinkib.net/Economics


- Inflation
- Interest rates are high
Peak
- Low unemployment
4% Contractionary
Expansionary
DP
re al G Expansionary
of
d
t re n
n
ng -r u Trough
Lo A recession occurs
when real GDP falls for - Deflation
two consecutive
quarters. - Interest rates are low
- High unemployment +6%
 Expansionary
AS
A minimum wage
increase or tax cut can
shift aggregate
P1 demand to the right
Price Level

causing demand for all

P
goods to increase, and
may lead to inflation.

AD1
AD
Q Q1
Real GDP
 Contractionary
AS

A tax increase or less

government spending
Price Level

can shift the demand

P
curve to the left
P1 causing demand for all
goods to decrease and
may lead to a
recession.
AD1 AD
Q1 Q
Real GDP
 Contraction/Expansion of the Business
Cycle

Expansion Contraction

 Business investments increase  Drop in business spending

 Interest rates go from low to  High unemployment (6 - 10% in

high recession)

 Consumer confidence increases  Interest rates go from high to low

 Low unemployment  Consumer confidence

 Saving for a rainy day
 Inflation may rise
 Deflation may occur
You are in an economy that depends on
sales of consumer goods. Consumer
spending is leading to economic expansion.
Consumers are buying houses, cars, and
electronic goods. These purchases are
creating new jobs for workers in these
industries.
The following occupations should
stand

 Factoryworkers
 House builders
 Air stewards
 Computer software designers
 The following occupations should stand

 Clothing sales workers

 Waiters

 Hair Stylists

 Luxury TV sales workers

As people’s incomes increase they become interested in more

purchases of things such as clothing, meals in restaurants, and
entertainment.
 Consumer spending is beginning to
decline!!

Consumers choose to spend less on clothing, meals in

restaurants, and entertainment……

 Factory workers

 Waiters

 Hair stylists

 Luxury TV sales workers

 Consumer spending continues to
decline!!

Consumers and businesses choose to spend less on cars,

houses, airplanes, and computer equipment……

 Autoworkers

 Home builders

 Airplane workers

 Computer software designers

The end