Download Business Cycle (Ups and Downs of the Economy)

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Business Cycle (Ups and Downs of the Economy)
There are four phases: Prosperity, Boom, Decline, and Recession.
Prosperity
The economy is improving and business activity increases.
Businesses produce more and hire more employees.
Consumers buy more.
Boom
Economic activity is at its peak.
Businesses are working at full capacity.
Stores are selling at record amounts.
Peak: Highest point of the Boom cycle.
Decline
The economy slows down.
Production is cut down.
Workers are laid off.
Recession
Lowest period for production.
Unemployment is high.
People do not buy as much.
Trough: Lowest point of a recession.
Depression: A severe recession.
Great Depression
The depression begins in 1929.
By 1933, salaries decreased by 40% and hourly wages by 60%
compared to 1929 levels.
The average family income fell from $2,300 to $1,600.
1930: 4 million Americans were unemployed. By 1933 the number
tripled.
Many Americans marked this as the end of capitalism. Communists
and Socialists fought with each other leading to the decline of this
movement.
New Deal
FDR’s plan to end the depression. First had to restore faith in banks.
Began “fireside chats” insuring Americans the situation would
improve.
Hundred Days: March 9-June 16, 1933. Congress passed 15 bills.
Most were written by FDR.
Financial Reform
Glass-Steagall Act (1933): Banks could not invest in the stock
market. Created the FDIC to insure deposits.
Federal Securities Act (1933): No stock market fraud.
The nations economy would now be split into fiscal and monetary
policy.
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Fiscal Policy
The way the government taxes and spends money.
In a recession:
o The government spends more money on public works projects
in order to provide jobs. This keeps companies running and
workers employed.
o Provides money to people and increases demand. Producers
will then increase supply.
o Tax cuts: Gives people more money to spend.
The government will control peaks by increasing taxes.
Monetary Policy
The way the government regulates the amount of money in
circulation. Accomplished through raising or decreasing interest
rates. The Federal Reserve (FED) is in control of monetary policy.
o Loose Money Policy: Can lead to inflation.
1. Easy to borrow
2. Consumers buy more
3. Business expansion
4. Employment increases
5. Spending increases
o Tight Money Policy: Can lead to recession
1. Difficult to borrow
2. Consumers buy less
3. No business expansion 4. Unemployment increases
5. Production decreases
Fractional Reserve Banking
The way banks create money.
Discount Rate: Prime rate that banks can borrow money from the
FED.
Reserve Requirements: Percentage of deposits that banks must hold.
Banks are free to loan out money that is not on reserve leading to
expansion.
Inflation
A decline in the value on money.
Purchasing power: Amount a dollar can buy.
Inflation is measured by the Consumer Price Index and the Implicit
GDP price deflator.
Consumer Price Index
Change in price over time of a specific group of goods and services
the average household uses.
Each year is compared to the average of 1982-1984. This makes the
base year.
This tells us the change in the standard of living.
Implicit GDP Price Deflator
Takes inflation away for year comparisons.
The base year used for comparisons is 1987.
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Gross Domestic Product
The total dollar value of all final goods and services produced and
sold in the nation during a single year.
Value is always expressed in terms of the dollar.
Final means only finished goods.
Only new items are counted. Anything bought used is not counted.
GDP Categories
Consumer Goods: Goods or services bought by consumers for direct
use.
Business Goods: Business purchase of tools, machines, and buildings
used to produce other goods.
Government Goods: Anything bought by federal, state, and local
governments.
Export: Anything sold to other countries.
Import: Anything bought from other countries.
Net Exports: The difference in what the nation buys and sells with
other countries.
Unemployment
Unemployment rate: Percentage of the labor force without jobs but
actively looking for work.
Unemployment reduces living standards, disrupts families, and causes
a loss of self-respect.
Reaches its height during recession.
Types of unemployment
Cyclical: Associated with the ups and downs of the economy.
Structural: Changes in the economy based on technology.
Seasonal: Based on weather.
Frictional: Based on people being terminated or looking for new jobs.