Page 86 - Business Principles and Management

Chapter 3 • Economic Environment of Business

FIGURE 3-7 Business cycles are irregular in length and in severity.

Business Cycle Phases
PHASE EXPLANATION POPULAR NAME

Expansion Low inflation

Modest rise in GDP, profits,
and employment

Modest to
Peak
runaway inflation
Growth reaches its highest level,
as do profit and employment

Contraction Modest inflation
Growth begins to decline,
as does employment

No growth, recession,
Trough
or depression
Lowest point in the cycle,
with increased unemployment

Government expenditures also influence economic growth. The federal
government operates by spending billions of dollars each year to pay salaries
and to buy equipment. Government can increase its spending to stimulate a
slow economy or reduce spending to slow eco-
nomic growth.
In addition, economic growth is regulated through
interest rates, the money paid to borrow money.
Borrowing by businesses and consumers generates
spending. Spending stimulates economic growth. Many industry trade organizations try to main-
When interest rates are lowered, businesses are tain demand for their products. They do this by
encouraged to borrow. This stimulates business creating advertising to influence consumer
activity and, in turn, the economy. When interest consumption and lobbying governments to
rates are raised to discourage borrowing, a slow- influence trade policies. Point your browser to
down occurs. www.thomsonedu.com/school/bpmxtra. Visit
Through interest rates, government spending,
taxes, and other devices, the rate of economic the National Cattlemen’s Beef Association Web
site. Explain how cattlemen’s industry groups
growth can be controlled somewhat. Control, how- help to maintain demand for beef. Consider the
ever, is usually kept to a minimum in a free-enter- impact on both consumer demand and govern-
prise system. Furthermore, in a complex economic ment actions. Explain how high demand affects
system the results of such controls are not always the price of beef. Visit another product trade
clearly visible in the short run. Economists do not organization’s Web site (such as that for milk,
always know exactly when control devices should orange juice, or another common product).
be used, for how long they should be applied, or Explain what actions they are taking to increase
how effective they may be. Although the nature of the demand for their products.
controls can be debated, some control is needed to
prevent a destructive runaway inflationary period www.thomsonedu.com/school/bpmxtra
or a depression—a long and severe drop in the

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