Download Prosperity

Classification of
Economic Conditions
1
Prosperity
Employment rate and
demand for products
and services are high.
Recession
Unemployment rate is
increasing and
demand for products
and services are
lowering.
Recovery
Depression
Unemployment rate is
high and demand for
products and services
is lowering.
Unemployment
rate is lowering
and demand for
products and
services is
increasing.
2
Year
Income
Income
percent
change
from year 1
Gallon of
milk cost
Gallon of
milk cost
percent
change
from year 1
1
2
3
$36,000 $38,000 $21,000
n/a
5.6%
-42%
$2.49
$2.99
$3.19
n/a
20%
28%
Over a
three-year
period, how
has the
income
been
impacted by
the
cost of a
gallon of
milk?
3
Consumer Prices





Inflation
Causes of inflation
Consumer Price Index (CPI)
Deflation
Causes of deflation
4
Measuring Economic Activity

Inflation.





The rapid rise in prices caused by an
inadequate supply of goods and services.
Total demand exceeds total supply.
Dollars are plentiful, so their value declines
and prices increase
The result is a decline in purchasing
power; A dollar does not buy as much as it
did before inflation.
Retirees and individuals on a fixed income
are financially hurt the most because their
income buys less.
Inflation Reduces
Consumers’ Ability to Buy
Goods and Services
As prices go up
Money does not buy as much
Consumers cut back on their
spending
Benefits of Inflation

Economists suggest that an inflation rate
of 2-3% is healthy for the economy.





Wages rise more slowly than prices.
Producers make more profit and can hire
more workers.
Unemployment is lower.
Newly employed workers spend more money
and stimulate the economy.
The United States usually has mild to
moderate inflation.
Disadvantages of Inflation

If you do not keep up with inflation,
consumers will have a lower standard of
living.


Inflation most affects people on a fixed
income, retirees and the unemployed.
Most workers are affected when inflation is at
a moderate level.
Disadvantages of Inflation

Increasing inflation reduces the
consumers' ability to buy goods and
services.



Money does not buy as much (the value of
the dollar goes down).
Consumers will purchase only necessary
goods.
Consumers will have to cut back on their
spending
Disadvantages of Inflation



Inflation occurs when there is too much
money in the economy.
The government raises interest rates to
take money out of the economy.
Rising interest rates discourage consumers
and businesses from borrowing money.
Sales of durable goods fall.
 Consumers "make do" with current homes,
cars, etc.
 Business owners do not borrow to expand.

Disadvantages of Inflation


Workers ask for higher wages; businesses raise
prices to pay for the increases.
As consumers stop spending, business sales fall
and owners must cut back.


Some businesses have to layoff workers
People who lose their jobs will be able to buy fewer
goods and services

Careful financial management is crucial in dealing with
inflation.
Disadvantages of Inflation

Careful budgeting helps consumers cope
with limited economic resources.




Wise decision-making is also necessary to
combat the effects of inflation.
Comparison shopping, not impulse buying.
Change lifestyle as needed.
Savings and investments must keep up with
or ahead of inflation so that the money saved
does not lose value.
Measuring Economic Activity

Consumer Price Index (CPI).

A measure of the average change over
time in the prices paid by urban
consumers for a market basket of 400
consumer goods and services:
 Food
and beverage.
 Housing.
 Apparel.
 Transportation.
 Medical Care.
 Education.
Measuring Economic Activity

Deflation:


A decrease in the volume, or amount, of
currency so that there is less currency
available for goods and services within a
free market; this tends to force market
prices lower.
Deflation occurs when too few dollars are
chasing too many goods. Scarce dollars are
worth more, so prices go down.
Interest Rates

Types:







Prime rate
Discount rate
T-bill rate
Treasury bond rate
Mortgage rate
Corporate bond rate
Certificate of deposit rate
What is the primary
purpose of each?
• How do interest rates impact businesses?
15
Prime Rate





The interest rate charged by banks to their most
creditworthy customers (usually the most
prominent and stable business customers).
The rate is almost always the same amongst
major banks.
Adjustments to the prime rate are made by
banks at the same time
The prime rate does not adjust on any regular
basis.
The Prime Rate is usually adjusted at the same
time and in correlation to the adjustments of the
Fed Funds Rate.
Discount Rate



The interest rate charged to commercial
banks and other depository institutions
On loans they receive from their regional
Federal Reserve Bank's lending facility
Under the primary credit program, loans
are extended for a very short term
(usually overnight)
T-bill Rate





A short-term debt obligation backed by
the U.S. government
Maturity of less than one year
Sold in denominations of $1,000
Maximum purchase of $5 million
Commonly have maturities of one month
(four weeks), three months (13 weeks)
or six months (26 weeks).
Treasury Bond (T-Bond) Rate

A marketable, fixed-interest U.S. government
debt security

Maturity of more than 10 years

Make interest payments semi-annually

The income that holders receive is only taxed
at the federal level
Treasury Bond (T-Bond) Rate


Issued with a minimum denomination of
$1,000
Sold through auction
Mortgage rate



Interest rate on a loan secured by a
mortgage on a property
A Mortgage is a debt instrument that
is secured by the collateral of specified
real estate property
Borrower is obliged to pay back with
a predetermined set of payments
Corporate Bond Rate


A debt security issued by a corporation
and sold to investors
The backing for the bond is usually the
payment ability of the company


typically money to be earned from future
operations
Considered higher risk than government
bonds
Corporate Bond Rate



Interest rates are almost always higher,
even for top-flight credit quality
companies.
Issued in blocks of $1,000 in par value
A major source of capital for many
businesses
Certificate of Deposit Rate



A savings certificate entitling the bearer to
receive interest.
Bears a maturity date
A specified fixed interest rate


Generally issued by commercial banks


Can be issued in any denomination
Insured by the FDIC
Ranges from one month to five years.
Certificate of Deposit Rate


It is a time deposit that restricts holders
from withdrawing funds on demand.
It is still possible to withdraw the money,
this action will often incur a penalty.