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UNIT C ECONOMIC FOUNDATIONS AND FINANCING 5.01 Exemplify the stages in a business cycle. 1 Phases of the business cycle Business cycle: The movement of an economy through recurring phases. Expansion Recession Depression Trough Recovery 2 Expansion • Prosperous economy • Low unemployment • Increase in output of goods and services • High consumer spending • A good time for new businesses to start up or existing businesses to expand • Expansion continues until it reaches a peak, at which time a recession then begins. 3 Recession • A period of economic slowdown that lasts for at least six months • Reduction in workforce • Reduced consumer spending • Fewer goods and services being produced • Plans for business expansion are put on hold. • Businesses spend little money on research and development. • Ends when the economy reaches its trough 4 Depression • Period of prolonged recession • Does not always follow a recession • Very high unemployment • Many businesses are forced to shut down. • Very low consumer spending • Very little production of goods and services • Widespread poverty is the result of a depression. 5 Trough • Low point in the business cycle in which the economy transitions from recession to recovery • Economy stops slowing down • Indicates that a recovery is near 6 Recovery • A period of renewed economic growth following a recession or depression • Economic expansion begins again. • Business begins to increase. • Unemployed people begin to find jobs. • Demand for goods and services increases. 7 Factors affecting business cycles • Responses of businesses to current economic conditions • Consumer outlook and the resulting behaviors • External factors 8 Responses of businesses to current economic conditions • Expanding operations during periods of recovery or expansion – – – – Investing in new properties Purchasing new equipment Increasing inventories Hiring additional employees • Limiting operations during periods of recession – Laying off workers – Decreasing inventories to match the decreased demand for goods and services 9 Consumer outlook and the resulting behaviors • During a recession, consumers fear the loss of jobs and decreases in wages. – Loss of confidence in the economy – Reduction in consumer spending • During a period of economic prosperity and recovery, consumers are optimistic. – Increased consumer spending for material goods and luxury items – Increased production of goods (by businesses) to meet consumer demand 10 External factors affecting business cycles • Political changes – People – Policies • Seasonal, climatic, and weather changes – Holidays – Major weather events or acts of nature • International relations – Wars – International trade 11 Government’s influence over business cycles • Taxes may be raised when the government needs additional money to run programs. • Businesses and consumers have less money to spend when they are paying higher taxes. 12 Government’s influence over business cycles (cont.) • In order to boost the economy, the government may cut taxes, reduce interest rates, or establish federally funded programs. • The Federal Reserve can lower interest rates in order to encourage spending by businesses and consumers. 13 Government’s influence over business cycles (cont.) • If inflation becomes a problem, the government may increase interest rates in order to discourage consumers from buying on credit. • State and local governments may initiate tax-free shopping days in order to increase consumer spending, thus giving a 14 boost to the economy.