Download Guided Notes 23.2

Business Cycle – Stocks (Ch. 23, Section 2)
The Business Cycle
 The Business Cycle (AKA The Economic Rollercoaster)
 The ups & downs of the economy
 Alternating periods of growth & decline
 4 Phases
1. Expansion (Also known as Prosperity or Recovery)
 Economy is improving
 Businesses produce more needing more employees
 Higher employment means higher wages
 Higher wages mean higher consumption
 Higher consumption means more production
2. Boom
 Economic activity is at its peak
 Peak – the highest point of the boom
 Businesses are working at full capacity
 Law of Diminishing Returns – as a business adds more resources to production profits
will rise until a point where more resources begin reducing profits
3. Decline (Contraction)
 The economy is slowing down
 Production is cut down
 Workers are laid off
4. Recession
 Occurs when Real GDP goes down over 6 months
 Real GDP – shows economy’s production after the distortions of price increases have
been removed
 Eliminates impression that output has gone up when only prices have gone up
 Lowest period of production
 Unemployment is high
 People do not buy as much
 Trough: lowest point of a recession
 Depression: a severe recession
Unemployment
 Unemployment Rate
o Percentage of labor force without jobs but actively looking
o Unemployment reduces living standards, disrupts families & causes a loss of self respect
o Reaches its highest during a recession
 Types of Unemployment
o Cyclical – associated with the ups & downs of the economy
o Structural – changes in the economy based on technology
o Seasonal – based on the weather
o Frictional – based on people being terminated or looking for new jobs
The Great Depression
 The Great Depression
o Began in 1929 with a stock market crash
 Black Tuesday, October 29, 1929
o Many saw it as the end of capitalism
o Bank runs – people tried to get all their cash out of banks, banks ran out of money
o Herbert Hoover was president
 Hoovervilles – were names of shanties (homeless towns) during the Depression
 The New Deal
o Franklin D. Roosevelt’s plan to end the depression
o First 100 Days
 Restored faith in banks – Bank holiday
 Fireside Chats
 Financial Reform
 Glass-Steagall Act – 1933
o Banks could not invest in the stock market
o Repealed in 1980. Some believe the reason we are in this financial mess
today. (move up)
o FDIC created
o Guarantees usually $100,000, but from Oct. 3, 2008 to December 31,
2009 up to $250,000
 Federal Securities Act – 1933
o SEC created as a result of this act
o No stock market fraud
 Splits the nation’s economy
o Fiscal policy – the Government
o Monetary policy – the Federal Reserve
Measuring the Economy
 Inflation
o Decline in the value of money
o Purchasing power – amount the dollar can buy
o Measured by the Consumer Price Index & Implicit GDP price deflator
 Consumer Price Index (CPI)
o Samples prices for 400 products commonly used
 Change in price over time of goods & services the average household uses
o Base year – 1982-1984 – the average of these years is compared to each year
 Implicit GDP Price Deflator
o Takes inflation out of GDP for year to year comparisons
o Base year – 1987
 GDP Categories
o Consumer goods – bought by consumers for final use
o Business (Capital) goods – bought to be used by a business to produce other goods
o Government goods – anything bought by the federal, state and local governments
 Net Exports
o The difference in what the nation buys & sells with other countries
o Export – anything sold to another country
o Import – anything bought from other countries
Stocks
 Corporations sell stock to raise financial capital
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




People buy stock to make money
o Dividends – share of a corporation’s profits
o Capital Gain – when stock is sold for more than it originally cost – Rule: Buy low, sell high
Stock Indexes
o Statistical measures that track stock prices over time
o The ticker
o Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P)
Stock Exchanges
o Stock market – where stock is bought & sold
 Ex: NYSE – largest & most prestigious
 Others: American Stock Exchange, Chicago Mercantile Exchange, Electronic –
NASDAQ
o Changes in stock prices are based on market forces of supply & demand
Bull Market
o Investors expect growth, profits high & unemployment low
o Prices tend to rise
Bear Market
o Investors are pessimistic, profits drop & unemployment rises
o Prices fall
Changes to Stock Prices
o Change in profits
o Rumors (externalities)
o News
Stockbroker – person who buys & sells stock
Business Cycle – Stocks (Ch. 23, Section 2)
The Business Cycle
 The Business Cycle (AKA The Economic __________________________________________________)
o The ups & downs of the economy
o _________________________________________________________________________________________________
 4 Phases
1. _________________________________ (Also known as Prosperity or ____________________________)


Economy is ________________________________________
Businesses produce more needing more employees



_____________________________________________________________________________________________________
Higher wages mean higher consumption
Higher ____________________________________________ means more production
2. ___________________________________________
 Economic activity is at its peak

________________________________________________________________________

Businesses are working at ____________________________________________________

______________________________________________________ – as a business adds more resources to production profits
will rise until a point where more resources begin _____________________________________________________________
3. ________________________________
 The economy is __________________________________________________________


Production is ______________________________________________
Workers are laid off
4. ____________________________________________________________

____________________________________________________________________________________________________
o
o
Real GDP – shows economy’s production after the ____________________________________________________
Eliminates impression that output has gone up when only prices have gone up
o
________________________________________________________________________
o
Unemployment is ______________________
o
________________________________________________________________________
o
_____________________________________: lowest point of a recession
o
Depression: _________________________________________________
Unemployment
 Unemployment Rate
o
______________________________________________________________________________________________
o

Unemployment reduces ________________________________________________, disrupts families & causes a loss
of self respect
o Reaches its highest during a recession
Types of Unemployment
o
________________________________________ – associated with the ups & downs of the economy
o
Structural – ____________________________________________________________________________________
o
Seasonal – ______________________________________________________________________
o
______________________________________ – based on people being terminated or looking for new jobs
The Great Depression
 The Great Depression
o
_______________________________________________________________________________

o
Many saw it as the end of capitalism
o
o
____________________________________ – people tried to get all their cash out of banks, banks ran out of money
Herbert Hoover was president


____________________________________________, October 29, 1929
__________________________________– were names of shanties (homeless towns) during the Depression
________________________________________________
o
_____________________________________________________________ plan to end the depression
o
____________________________________________________



Restored faith in banks – ____________________________________________
Fireside Chats
Financial Reform
 Glass-Steagall Act – 1933


o
o
______________________________________________________________________
Repealed in 1980. Some believe the reason we are in this financial mess today. (move up)
o
o
_________________________________________________________
Guarantees usually $100,000, but from Oct. 3, 2008 to December 31, 2009 up to $250,000
________________________________________________________________
o SEC created as a result of this act
o No stock market fraud
Splits the nation’s economy
o Fiscal policy – _____________________________________________
o __________________________________ policy – _______________________________
Measuring the Economy
 Inflation
o _______________________________________________________________________________
o
o

________________________________________________________ – amount the dollar can buy
Measured by the Consumer Price Index & Implicit GDP price deflator
______________________________________________________ (CPI)
o Samples prices for 400 products commonly used
 Change in price over time of goods & services the average household uses
o
_________________________ – 1982-1984 – ________________________________________________________
___________________________________________


Implicit GDP Price Deflator
o Takes ________________________________________ out of GDP for year to year comparisons -Base year – 1987
GDP Categories
o Consumer goods – _______________________________________________________________
o Business (Capital) goods – bought to be used by a business to produce other goods

o ____________________________________________ – anything bought by the federal, state and local governments
Net Exports
o The difference in what the _______________________________________________________________________
________________________________________________________
o
Export – _______________________________________________________________________________
o ______________________________ – anything bought from other countries
Stocks
 _________________________________________________________________________________________________

People buy stock to make money
o
Dividends – ___________________________________________________________________________
o
_________________________________________ – when stock is sold for more than it originally cost – Rule:
_______________________________________________________


______________________________________________
o Statistical measures that track stock prices over time
o __________________________________________
o Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P)
Stock Exchanges
o Stock market – where _____________________________________________________________


o

Ex: _____________________________ – largest & most prestigious
Others: American Stock Exchange, Chicago Mercantile Exchange, Electronic – NASDAQ
Changes in stock prices are based on market forces of _____________________________________________
______________________ Market
o Investors expect ________________________________________________________________________________
__________________________________________________________________
o

_____________________ Market
o

Investors are pessimistic, profits drop & _______________________________________________________
o ________________________________________________________
Changes to Stock Prices
o
o
o

Prices tend to rise
_____________________________________________________
Rumors (externalities)
News
________________________________________ – person who buys & sells stock