2 Section 6.1 Economic Ups and Downs ObjectivesDescribe the phases of the business cycle;Analyze the effects of economic conditions on consumers;Discuss factors that affect the state of the economy; andExplain measurements used to gauge the state of the economy.
3 Business Cycle – the ups and downs of the economy PeakExpansionContractionTrough
4 Types of Business Cycles Contraction – business activity slows downIf the contraction last long enough and is deep enough, the economy goes into recessionTrough – at the lowest point in the cycle, business activity levels offExpansion - the economy begins to recoverPeople spend more money and open more businesses, demand brings more production of goods and services and employment risesPeak – a period of prosperity marks the highest point of the cycleEventually, however a contraction occurs and the cycle starts over again
5 Lasts about 6 months 1 year Recession – is a period of significant decline in the economyLasts about 6 months 1 yearThe economy produces more than people can consumeBusinesses don’t make money and have to lay off workersWorkers don’t have money and therefore cannot spendRecession can lead to DEPRESSION
6 Depression – a major economic slowdown, Depression – a major economic slowdown, longer lasting and more seriousThe Great Depression – dominated the world economy in the 1930’sSome believe that the stock market crashing had very little to do with it, they believe it was poor policy decisions by the governmentLasted until WWII
7 Inflation – prolonged rise in the price of goods and services It affects consumers by reducing their purchasing powerWhen prices rise sharply, your dollar buys fewer goods and services than before
8 Interest – fee paid for the opportunity to use someone else’s money over a period of time Inflation also affects consumers who borrow, lend, or invest moneyInflation can also benefit someone who has borrowed money at a fixed interest rate that is lower than the rate of inflation
9 Factors Affecting Ups and Downs Consumer ConfidencePsychological factor – based on the feelings of the consumerTechnological InnovationSpurred by inventionsCan transform the economy, the workplace, and the cultureGovernment PoliciesCan either help or hurt the economyWarGovernment pumps billions of dollars into the economy to support troops in need of goods and services
10 Measuring the Economy’s Performances Economic Indicators – measurements used to monitor the health of the economyGross Domestic Product (GDP) – is the total dollar value of goods and services produced in a country during the yearUnemployment RateHigh unemployment rate means the economy is ailingConsumer Price Index (CPI) – measures the change in prices over time of a specific group of goods and servicesMarket Basket – 200 categories of goods and services that average household usesEach month the Bureau of Labor Statistics reports the percentage change in CPI
11 Local, National, and Global Economics Conditions Affecting the EconomyWeatherNatural disastersPopulation shiftsAvailability of workersLocal government policiesFortunes of local businesses
12 Section 6.2 Deficits and Debt ObjectivesDistinguish between a budget surplus and a budget deficit;Identify reasons for deficit spending by governments; andAnalyze the effects of the national debt on consumers.
13 The Budget ProcessBudget – is an estimate of anticipated income and expenses for a certain period of time.It is created by federal, state, and local governmentsIt is based on Fiscal Year (Begins Oct. 1 each year)The goal is to balance the budget so that planned spending does not exceed projected revenueThe house approves final budget, then becomes law
14 Budget Surplus – when more money was Budget Surplus – when more money was collected than spent at the end of the fiscal year.More common to be the oppositeDeficit Spending – the practice of spending more money than was received in revenueBudget Deficit – the amount by which spending exceeds revenue
15 Various Causes of Budget Deficits: WarRecessionPolicy decisions by Congress and PresidentNational Debt – (Public Debt) total amount of money that the federal government owes
16 Government Also Needs to Borrow Money Selling various types of securities:Saving BondsTreasury Bills
17 What’s the Impact?Some are not worried about the debt, because it has decreased since WWIISome are worried, because the interest takes up about 10-20% of the federal budget each year
18 Section 6.3 Stabilizing the Economy ObjectivesCompare and contrast fiscal and monetary policy;Explain the role of the Federal Reserve System; andAnalyze how the Fed’s actions affect consumers.
19 Stabilizing the Economy Section 6.3Stabilizing the EconomyTwo Types of PoliciesFiscal Policy – refers to the federal government’s use of taxing and spending policies to help stabilize the economyThey raise or lower taxes and increase or decrease government spendingCan take months before it affects the economyCarried out by the President and Congress
20 2. Monetary Policy - to regulate the money supply Money Supply – total amount of money in circulation at any given timeCarried out by nations central bank
21 The Federal Reserve System – (Fed) is the central bank of the U.S. Provides financial services to the banking industry and governmentIt regulates banks to make sure that they follow the lawPrimary responsibility is to set Monetary PolicyFederal Reserve Board – (Board of Governors) runs the Federal Reserve System.Federal Open Market Committees (FOMC) – seven members nominated by the President and five presidents of district Federal Reserve Banks.Their decisions affect the stock market
22 The Fed and the Money Supply Increase money supply, credit becomes more available and less costly, which helps consumers and businesses to spend moreDecrease money supply, credit becomes harder to get and more expensive, which causes consumers and businesses to spend less
23 Fed can manipulate the money supply in three ways: Engage in open market operationsRaise and lower the discount rateAdjust the reserve requirement
24 Open Market Operations Most frequently used tool in selling or buying government securities – stocks, bonds, and other financial assets in the open marketDecreased money supply, government sells holdings of government securities, buyers will pay for these and therefore takes money out of the circulation
25 Opposite affect cause them to buy Opposite affect cause them to buy securities, which puts money back into circulationFederal Funds Rate – this is the interest rate at which banks lend money to one another overnightNot controlled by the Fed, but strongly influencedTends to trigger changes in the interest rate that financial institutions charge consumers and businesses
26 The Discount RateSometimes banks have to borrow money from the Fed to encourage them to give discounts to consumers and businessesDiscount Rate – interest rate that banks pay to the Fed.The direct affect of the discount rate on money supply is usually very small
27 Reserve RequirementsReserve Requirements - The % of a bank’s deposit that it must keep on handHolding money in reserve helps take money out of circulation.
28 Effects on ConsumersWhat you’ll pay for goods and servicesYour ability to get credit and the interest rates you will payWhat you will earn in interestYour job stability and the wages you are paid