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Chapter 3

EconomicActivity in aChanging World

Section 3.2

The BusinessCycle

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

prosperity

the rise and fall of economic

activity over time

the peak of economic

activity

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Key Terms

recession

depression

when economic activity

slows down

a deep recession that affects the

entire economy and lasts for

several years

Key Term

recoverya 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.

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

Graphic OrganizerFour Stages of the Business Cycle

business cyclethe rise and fall of economic activity

The business cycle of

one country can affect

other trading partners.

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Business Cycle ModelFigure 3.1 Prosperity

Prosperity results

from low

unemployment,

high production of

goods and services,

and the opening of

new businesses.

prosperitya peak of economic activity

Graphic Organizer

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

Characteristics of Prosperity

Recession

During a recession,

businesses produce

less, so they need

fewer workers.

recessionwhen economic activity slows down

Graphic Organizer

Businesses produce less

Unemployment increases

People have less money to spend

Fewer goods and services are produced

The GDP declines

Characteristics of a Recession

Recession

A recession in one industry can cause a ripple

effect throughout the entire economy.

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Depression

A depression can be

limited to one country

but usually spreads to

related countries.

depressiona deep recession

Graphic Organizer

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

Characteristics of a Depression

Depression

The stock market crash on October 29, 1929,

or “Black Tuesday,” marked the beginning of

the Great Depression.

Graphic Organizer

TheGreat

Depression

The GDP fell

nearly 50percent

Unemploymentrose nearly

800 percent

The average

manufacturingwage was 5

cents an hour

Many banksaround the

countryfailed

The moneysupply fell

by one-third

Many towns

and other civic bodies printed

their own money

“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.

recoverya rise in business activity after a recession or depression

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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

Characteristics of a Recovery

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.

Chapter 3

EconomicActivity in aChanging World

Section 3.2

The BusinessCycle

End of