1. Macro233 - JFGAC
Business Cycles andBusiness Cycles and
InflationInflation

2. Macro233 - JAFGAC
Business CyclesBusiness Cycles
The business cycle is the upward and
downward movement of economic activity
that occurs around the growth trend.

3. Macro233 - JAFGAC
Business CyclesBusiness Cycles
There are a number of policies regarding
business cycles.
Classical economists generally favor
laissez-faire or noninterventionist policies.
Keynesians generally favor activist
policies.

4. U. S. Business CyclesU. S. Business Cycles
20
10
0
–10
–20
‘90‘801860 ‘70 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 ‘102000
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Civil
War
Recovery
of 1895
World War I
Panic
of 1893 Panic
of 1907
Great
Depression
Korean
War Vietnam War
World War II

5. Macro233 - JAFGAC
The Phases of the BusinessThe Phases of the Business
CycleCycle
The peak is the top of the business cycle.
A boom is a very high peak, representing
a big jump in output.
The downturn is the phenomenon of
economic activity starting to fall from a
peak.

6. Macro233 - JAFGAC
The Phases of the BusinessThe Phases of the Business
CycleCycle
A recession is a decline in output that
persists for more than two consecutive
quarters in a year.
A depression is a large recession.
A trough is the bottom of the recession or
depression.

7. Macro233 - JAFGAC
The Phases of the BusinessThe Phases of the Business
CycleCycle
An expansion is an upturn that lasts at
least two consecutive quarters of a year.

8. Expansion ExpansionRecession
The Phases of the BusinessThe Phases of the Business
CycleCycle
Boom
Secular
growth
trend
Downturn
Upturn
Trough
Peak
0
Jan.-
Mar
TotalOutput
Apr.-
June
July-
Sept.
Oct.-
Dec.
Jan.-
Mar
Apr.-
June
July-
Sept.
Oct.-
Dec.
Jan.-
Mar
Apr.-
June
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

9. Macro233 - JAFGAC
Why Do Business Cycles OccurWhy Do Business Cycles Occur
Recessions and expansions are caused
primarily by demand-side of the economy.
A debate exists about whether these
fluctuations can and should be reduced.

10. Macro233 - JAFGAC
Why Do Business Cycles OccurWhy Do Business Cycles Occur
Most economists believe that potential
depressions should be offset by economic
policy.

11. Macro233 - JAFGAC
Why Do Business Cycles OccurWhy Do Business Cycles Occur
Since the late 1940s, compared to prior
years:
Downturns and panics have generally been
less severe.
The duration of business cycles has increased.
The average length of expansions has
increased while the average length of
contractions has decreased.

12. Macro233 - JAFGAC
Why Do Business Cycles OccurWhy Do Business Cycles Occur
Most economists believe that business
fluctuations have become less severe
because of the stronger role of
government in the economy.

13. Macro233 - JAFGAC
InflationInflation
Inflation is a continual rise in the price
level.
From 1800 until World War II, the U.S.
inflation rate and price level fluctuated.
Since World War II, the rate fluctuated, but the
movement of the price level has been
consistently upward.

14. Inflation Since 1900Inflation Since 1900
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
3020101900 40 50 60 70 80 90 2000
–10
–5
0
5
10
15
20
25

15. Macro233 - JAFGAC
Measurement of InflationMeasurement of Inflation
Inflation is measured with changes in price
indexes.
Price index – a number that summarizes
what happens to a weighted composite of
prices of a selection of goods over time.

16. Macro233 - JAFGAC
The GDP DeflatorThe GDP Deflator
The GDP deflator (gross domestic
product deflator) is an index of the price
level of aggregate output or the average
price of the components in GDP relative to
a base year.

17. Macro233 - JAFGAC
The GDP DeflatorThe GDP Deflator
The GDP deflator is the measure of
inflation most economists favor since it
includes the widest number of goods.

18. Macro233 - JAFGAC
Expected and UnexpectedExpected and Unexpected
InflationInflation
Expected and unexpected inflation affects
behavior differently.
Expected inflation is inflation people
expect to occur.
Unexpected inflation is inflation that
surprises people.

19. Macro233 - JAFGAC
Expected and UnexpectedExpected and Unexpected
InflationInflation
Expectations of inflation play an important
role in the inflation process.
Inflationary expectations can accelerate
large inflation.

20. Macro233 - JAFGAC
Costs of InflationCosts of Inflation
Inflation may not make a nation poorer.
It can redistribute income from those who
do not raise their prices to those who do.
It can reduce the amount of information
that prices are supposed to convey.

21. Macro233 - JAFGAC
Costs of InflationCosts of Inflation
Inflation is usually accepted by
governments as long as it stays at a low
level.
What worries policymakers is
hyperinflation.

22. Macro233 - JAFGAC
Costs of InflationCosts of Inflation
Hyperinflation – exceptionally high levels
of inflation of, say, 100 percent or more a
year.
The U.S. has not experienced
hyperinflation since the Civil War (1861-65).