Download Ch 2.2 GB economic conditions change

2.2 ECONOMIC
CONDITIONS CHANGE
THE BUSINESS CYCLE
INFLATION AND DEFLATION
INTEREST RATES
1. Check stocks
2. Get ready for a powerpoint on the business cycle
3. We did it!
THE BUSINESS CYCLE
• All economies have good times and bad.
• This movement of the economy from good to bad to good is called a business
cycle.
• Recurring ups and downs of GDP
• Business cycle has four phases:
•
•
•
•
Prosperity
Recession
Depression
Recovery
PROSPERITY
• Peak of the business cycle
• Unemployment is low
• Businesses produce G&S in record numbers
• Wages are good
• GDP is increasing
• Demand for G&S is high
• Does not go on forever, eventually activity slows down
RECESSION
• The economy slows down
• Demand decreases
• Businesses lower production
• Unemployment rises
• GDP slows for two or more quarters
• May not be serious but often signals trouble
• Can cause the ripple effect
DEPRESSION
• When a recession deepens and spreads throughout the entire economy
• Long period of high unemployment
• Weak consumer sales
• Business failures
• GDP falls rapidly
• USA has not had a depression in 70 years
• During the Great Depression between 1930-1940, unemployment was
25%
RECOVERY
• Economic downturns do not last forever,
• Unemployment begins to decrease
• Demand for G&S increases
• GDP begins to rise
• Because people gain employment, they regain confidence about their future and begin
buying again
• As it continues, the nation moves to prosperity
INFLATION AND DEFLATION
• Inflation is the increase in the general level of prices
• Buying power decreases
• It takes more $ to buy the same things
• Most harmful to people on fixed incomes
• Causes of Inflation
• When demand for G&S is higher than supply
• When $ is spent for goods that are in short supply
DEFLATION
• Opposite of inflation
• Decrease in the general level of prices
• Usually occurs during recessions and depressions
• Prices are lower, but people have less money
• During the Great Depression prices lowered 25%
MEASURING INFLATION
• Mild inflation can stimulate the economy (2-3%)
• Wages rise more slowly than the prices of products
• Producers make higher profits, expand production and hire more workers
• New workers increase spending and the total demand increases
• The Consumer Price Index (CPI) compares prices in one year with prices in some earlier
base year
INTEREST RATES
• Cost of money
• Higher interest rates mean higher business costs
• People with poor credit ratings pay a higher interest rate
TYPES OF INTEREST RATES
• PRIME RATE – Rate banks make available to their best business customers (large
corporations)
• DISCOUNT RATE – Rate banks are charged to borrow money from the Federal
Reserve banks
• T-BILL RATE – Yield on short-term (13wk)U.S. government debt obligations
• TREASURY BOND RATE – Yield on long-term (up to 30 years) U.S. government debt
obligations
• MORTGAGE RATE – Rate individuals pay to borrow for a purchase of a new home
• CORPORATE BOND RATE – The cost of borrowing for U.S. corporations
• CERTIFICATE OF DEPOSIT RATE – Rate for time deposits at savings institutions
• In conclusion:
• The supply and demand for money is the major influence on the level of interest rates
• As amounts saved increase, interest rate decline
• When amounts borrowed increase, interest rates increase