1. Measuring the Economy
23.2,

2. Vocab unit 2 part 2 Business Cycle Real GDP Unemployment Rate
Fiscal Policy
Inflation
Consumer Price Index (CPI)
Central Bank
Federal Open Market Committee (FOMC)
Monetary Policy
Discount Rate
Reserve

3. Measuring Growth
When the economy grows, businesses are producing more goods and services and more workers are hired.
Remember, GDP is one measure of the economy’s growth ($ value of all final goods and services produced in a country in a single year.
When prices increase, GDP would go up even if the economy was not growing.
To avoid this false impression, economists use Real GDP – shows an economy’s production after the distortions of price increases have been removed – Just because prices went up doesn’t mean output increased

4. The Business Cycle The Business Cycle (AKA The Economic Rollercoaster)
The ups and downs of the economy
Alternating periods of growth & decline in the economy

5. Business Cycle Peak Real/Implicit GDP Trough Boom Expansion/
Prosperity
Decline/
Contraction
Recovery/
Prosperity
Recession

6. 1. Expansion - Prosperity
4 Economic Phases
1. Expansion - Prosperity
Economy is improving
Consumers buy more
Business activity is increasing – production and employees
Real GDP is going up
Largest recent expansion – March 1991 – March 2001
3. Contraction – Decline
Economy slows down
Production cut
Workers laid off
Tend to be ½ as long as expansions
2. Boom
Economic activity peaks
Businesses work at full capacity
Stores sell at record amounts
*Peak – highest point of boom. Economy cannot get any better
4. Recession
Lowest period for production – economic decline for 6 straight months or more
High unemployment
Low consumer spending
*Trough – lowest point of a recession
*Depression – severe recession

7. Business Cycle

8. What is the highest point in the business cycle?
Boom
Trough
Expansion
Peak

9. Unemployment
Another way to measure the economy is to look at employment
Civilian Labor Force – includes all civilians 16 years old and older who are either working or looking for work.
Unemployment rate – the % of people in the civilian labor force who are not working but are looking for jobs

10. Unemployment rate reflects the health of the economy.
Tends to rise sharply during recessions, and then slowly declines
Unemployment affects the income of individuals as well as the economy as a whole
People lose their jobs; cut back on their purchases

11. Fiscal Policy
The way the government taxes and spends money to reduce high unemployment
In a recession:
The government spends more money on public works projects in order to provide jobs. This keeps companies running and workers employed.
Provides money to people and increases demand. Producers will then increase supply.
Tax cuts: Gives people more money to spend.
The government will control expansions by Increasing taxes.
Often political differences prevent the effective use of fiscal policy
Automatic stabilizers help

12. Price Stability
Inflation - A decline in the value on money. Sustained increase in the level of prices Decreases purchasing power: Amount a dollar can buy. Therefore altering economic decisions people make Inflation is measured by the Consumer Price Index
Consumer Price Index (CPI) - Change in price over time of a specific group of goods and services the average household uses. Gov’t samples prices every month for about 400 commonly used products
The rate of inflation is the change in the average level of prices as measured by the CPI
This tells us the change in the standard of living.

13. If the price of an item doubles, you would need twice as many dollars to buy the item; the purchasing power of your dollar has fallen
Ex. Ice cream cones
Harder on people with fixed incomes – Why?
Prices act as signals which help us make economic decisions. High inflation distorts this process; we begin to speculate rather than invest thus the economy suffers

14. Answer the following using complete sentences –
Do you think it is the government’s responsibility to try to balance the ups and downs of the business cycle? Why or why not?
Make sure to tie in what we have learned in class – business cycle, economic systems…..

15. Stocks Corporations sell stock to raise financial capital
Investors/People buy stocks to make money – Individual ownership in a corporation. Shareholder receives voting rights and dividends.
Profits can be earned in 2 ways -
Dividends – a share of a corporation’s profits distributed to stockholders
Capital Gains – when stock is sold for more than it originally cost
Rule: Buy low, sell high

16. Stocks Supply and demand determine the price of a company’s stock
Other factors such as - Change in profits, Rumors (externalities), News – will also change stock prices
Stock Indexes
Statistical measures that track stock prices over time
Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P)

17. Stock Exchanges Stock market – where stock is bought & sold
Ex: NYSE – largest & most prestigious, NASDAQ – 2nd largest
Stock indexes reveal investors’ expectations about the future
Bull Market
Investors expect growth, profits high & unemployment low
Prices tend to rise
Bear Market
Investors are pessimistic, profits drop & unemployment rises
Prices fall