CHAPTER 9 (21)
Economic Growth, the Financial System, and Business Cycles
markets—or indirectly through financial intermediaries such as banks. Financial markets andfinancial intermediaries together comprise the
. The funds available to firms comefrom saving.
There are two categories of saving in the economy: private saving by households and public saving by the government. In the model of the
market for loanable funds
, the interaction of borrowers and lenders determines the market interest rate and the quantity of loanable fundsexchanged.3.
Explain what happens during a business cycle.
A business cycle consists of alternating periods of economic expansion and contraction. During the expansion phase of a business cycle, production,employment, and income are increasing. The period of expansion ends with a business cycle peak.Following the business cycle peak, production, employment, and income decline during the recession phase of the cycle. The recession comes to an end with a business cycle trough, after which another period of expansion begins. The inflation rate usually rises near the end of a business cycle expansionand then falls during a recession. The unemployment rate declines during the latter part of expansionand increases during a recession. The unemployment rate often continues to increase even after anexpansion has begun. Economists have so far not been successful in discovering a method to predictwhen recessions will begin and end. Recessions are difficult to predict because they do not have onlyone cause.
Chapter Opener: Growth and the Business Cycle at Boeing (pages 274-275)
Established in 1916, Boeing has grown into one of the world’s largest designers and manufacturers of commercial jetliners, military aircraft, satellites, missiles, and defense systems. Like many other companies, Boeing’s experiences have mirrored that of the U.S. economy. Because they are a producer of durable goods, their sales have been vulnerable to the business cycle
When looking at output over longer periods of time, both real GDP and real GDP per capita rise. However, over shorter periods of time, realGDP and real GDP per capita do not grow smoothly and the economy will experience the periodicincreases and decreases in production called
. During the recession of 2001, Boeingexperienced a decline in business due to a fall in the demand for travel. Five years later in 2006, Boeingexperienced quite the opposite: a record-breaking year with orders for airliners soaring as a result of economic growth in the United States, Europe, and Asia. Boeing is just one of many examples of acompany affected by the business cycle.
Helpful Study Hint
An Inside Look
at the end of the chapter to learn how China’sdomestic aviation market is struggling to earn a profit for three reasonsassociated with long-run growth:1. The Chinese airline industry’s recent large investment in new planes.2. The Chinese government’s failure to liberalize markets for air travel.3. A shortage of human capital, including pilots.The
feature asks you to consider what helps the economy more: when you spend money on goods andservices, or when you save money instead? Keep the question in mind asyou read the chapter. The authors will answer the question at the end of the chapter.