1. Introduction to Business Dr. H. Ronald Moser Cumberland University
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Understanding Economics and How It Affects Business
Chapter 02
Understanding Economics and
How It Affects Business
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Had great influence on U.S. economic policy.
PROFILE
JOHN MAYNARD KEYNES
Had great influence on U.S. economic policy.
Believed if the economy was in a recession, the government should increase spending and cut taxes to stimulate the economy for a short term.
Wrote The General Theory of Employment, Interest and Money in
2-3

4. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
A major part of the United States business success is due to an economic and social climate that allows most businesses to operate freely.
People are free to start a business anywhere, and just as free to fail and start again. Most fail the first five years (about 52% in the nation, but about 75% in Tennessee).
“Where did I go wrong?”
See Learning Goal 1: Explain basic economics.
Businesses can contribute to an economic system by inventing new products that increase the availability of resources.
Global economics and global politics also have a major influence on businesses in the United States. Therefore, to understand business, you must also understand basic economics and politics. 4

5. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
What is Economics?
Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.
There are two major branches of economics:
Macroeconomics looks at the operation of a nation’s economy as a whole ( the whole United States).
See Learning Goal 1: Explain basic economics.
Businesses can contribute to an economic system by inventing new products that increase the availability of resources.
United States
Tennessee
Microeconomics looks at the behavior of people and organizations in markets for particular products or services. It also looks at how market conditions determine the price of a specific product. 5

6. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
Resource Development
What is Economics?
Resource Development -- The study of how to increase resources and create conditions that will make better use of them. Businesses can contribute to an economic system by inventing products that greatly increase available resources.
See Learning Goal 1: Explain basic economics.
Businesses can contribute to an economic system by inventing new products that increase the availability of resources.

7. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
What is Economics?
Examples of Ways to Increase Resources
New energy sources
Hydrogen fuel for autos.
New ways of growing foods
Hydroponics.
New ways of creating goods and services
Mariculture- Raising fish in pens
Nanotechnology-New ways of creating needed goods and services.
See Learning Goal 1: Explain basic economics.

8. More Profits from the Green Revolution (Thinking Green)
HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
Resource Development
More Profits from the Green Revolution (Thinking Green)
The public’s concern with global warming contributed to the success of the Toyota Prius.
Farmers are growing more corn and other crops to use for biofuels.
What can you do to help lower carbon emissions?
See Learning Goal 1: Explain basic economics.

9. Thomas Malthus and the Dismal Science
HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
Thomas Malthus and the Dismal Science
The Secret to Creating a Wealthy Economy
Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.
This belief led the writer Thomas Carlyle to call economics “The Dismal Science.”
Neo-Malthusians believe there are too many people in the world and believe the answer is radical birth control.
See Learning Goal 1: Explain basic economics.
Thomas Malthus believed that if people were left to their own devices there would be chaos and that the government needed to be heavily involved in controlling the economy. Malthus’ ideas are still with us today. Neo-Malthusian ideas of overpopulation are still prevalent in books such as Paul Ehrlich’s The Population Bomb (1968) which contains ideas similar to those presented by Thomas Malthus 200 years ago.

10. Population as a Resource
HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
The Secret to Creating a Wealthy Economy
Population as a Resource
Contrary to Malthus, some economists believe a large population can be a resource.
An educated population is highly valuable.
Business owners provide jobs and economic growth for their employees and communities as well as for themselves.
See Learning Goal 1: Explain basic economics.
Malthus viewed a large population as a negative. However, many economists see a highly educated population as a valuable scarce resource. Countries like Japan and Germany have become economically successful in a postwar environment with large well-educated populations producing sophisticated high-value products.

11. Smith believed that: Adam Smith and the Creation of Wealth
HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
Adam Smith and the Creation of Wealth
Adam Smith, the Father of Economics
Smith believed that:
Freedom was vital to any economy’s survival.
Freedom to own land or property and the right to keep the profits of a business is essential.
People will work hard if they believe they will be rewarded.
See Learning Goal 1: Explain basic economics.
Adam Smith’s ideas were laid out in his seminal book, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith believed strongly in more “natural liberty” and less government intervention into the economy (an idea that was an anathema to Malthus). Smith argued that allowing people the freedom to own land and the right to keep profit would not create chaos as Malthus had argued, but rather would create greater resources for all.
2-11

12. The Invisible Hand Theory
HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
How Businesses Benefit the Community
The Invisible Hand Theory
In Adam Smith’s view, business people don’t necessarily deliberately set out to help. They work primarily for their own prosperity and growth.
As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas.
Invisible Hand -- When self-directed gain leads to social and economic benefits for the whole community.
See Learning Goal 1: Explain basic economics.

13. Understand the Invisible Hand Theory
HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
Understand the Invisible Hand Theory
How Businesses Benefit the Community
A farmer earns money by selling his crops.
To earn more, the farmer hires farmhands to produce more crops.
When the farmer produces more, there is plenty of food for the community.
The farmer helped his employees and his community while helping himself.
See Learning Goal 1: Explain basic economics.

14. UNDERSTANDING FREE- MARKET CAPITALISM
Basing their ideas on free-market principles such as those of Adam Smith, business people in the United States, Europe, Japan, Canada, and other countries began to create more wealth than ever before.
They hired others to work on their farms and in their factories, and their nations began to prosper as a result.
See Learning Goal 1: Explain basic economics.
Business people soon became the wealthiest people in society.
The economic system that has led to wealth creation in much of the world is known as Capitalism. 14

15. Capitalism
UNDERSTANDING FREE- MARKET CAPITALISM *
Capitalism -- All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit.
Countries with capitalist foundations:
United States
England
Australia
Canada
See Learning Goal 2: Explain what capitalism is and how free markets work.
This slide gives students the opportunity to apply the concept of capitalism in the United States and analyze the impact government ownership of AIG, Fannie Mae and Freddie Mac will have on the future state of capitalism in the United States.

16. The Foundations of Capitalism
Under free market capitalism people have four basic rights:
1. The right to own private property. The most fundamental of all rights under capitalism.
The right to own a business and keep all that business’ profits. Profits act as important
incentives for business owners.
3. The right to freedom of competition. With certain guidelines established by the government, individuals are free to compete with other individuals or businesses in selling and promoting goods and services.
See Learning Goal 2: Explain what capitalism is and how free markets work.
The four basic rights under a capitalist system are straightforward, but which of the four basic rights has been weakened in the United States over the past 30 years? When asked this question, rarely do students touch on the concept of eminent domain and the weakening of right to own private property due to the Kelo vs. New London Supreme Court case from If time permits students can explore this case and the potential impact the case may have on America capitalism.
The right to freedom of choice. People are free to choose where they want to work and what career they want to follow.

17. Roosevelt’s Four Additional Rights
The Foundations of Capitalism
Roosevelt’s Four Additional Rights *
Freedom of speech and expression.
Freedom to worship in your own way.
Freedom from want.
Freedom from fear.
See Learning Goal 2: Explain what capitalism is and how free markets work. 17

18. Consumers send signals about what they like and how they like it.
Free Markets
How Free Markets Work
Free Market -- A free market is one in which decisions about what and how much is produced are made by buyers and seller negotiating prices for goods and services. Decisions about what and how much to produce are made by the market.
Consumers send signals about what they like and how they like it.
See Learning Goal 2: Explain what capitalism is and how free markets work.
Price tells companies how much of a product they should produce. If something is wanted but hard to get, the price will rise until more products are available.

19. UNDERSTANDING FREE- MARKET CAPITALISM
Pricing
How Prices Are Determined
A seller may want to sell shirts for $50, but only a few people may buy them at that price.
If the seller lowers the price to $30, more people buy the shirts.
The seller establishes a price of $30 based on what consumers are willing to pay.
See Learning Goal 2: Explain what capitalism is and how free markets work.
Prices are determined by consumers negotiating with the sellers.
Price is determined by what the customer is willing to pay.

20. The Economic Concept of Supply
Supply Curves
The Economic Concept of Supply
Supply -- The quantities of products businesses are willing to sell at different prices. Generally speaking, the amount supplied will increase as the price increases, because sellers can make more money with a high price.
See Learning Goal 2: Explain what capitalism is and how free markets work. 20

21. The Economic Concept of Demand
Demand Curves
The Economic Concept of Demand
Demand -- The quantities of products consumers are willing to buy at different prices. Generally speaking, the quantity demanded will increase as the price decreases.
See Learning Goal 2: Explain what capitalism is and how free markets work. 21

22. * The Equilibrium Point, or Market Price
Market Price (Equilibrium Point) -- Determined by supply and demand, this is the negotiated price. In the long run, the point on a graph where the supply for a product or services equals the demand for the product or service is the equilibrium price. *
See Learning Goal 2: Explain what capitalism is and how free markets work. 22

23. Four Degrees of Competition
Competition within Free Markets
Perfect Competition- exists when there are many sellers in a market and none is large enough to dictate the price of a product Maybe farming is an example.
2. Monopolistic Competition- a large number of sellers produce very similar products that buyers nevertheless perceive as different, such as hot dogs, sodas, personal computers, and T-shirts.
3. Oligopoly- is a degree of competition in which just a few firms dominate an industry, such as in the tobacco, gasoline, automobiles, U.S. Steel, Inc and aircraft industries. Not a lot of price wars here.
See Learning Goal 2: Explain what capitalism is and how free markets work.
4. Monopoly- Occurs when one seller controls the total supply of a product or services, and sets the price. In the U.S. a monopoly is prohibited by law.

24. Competition within Free Markets
UNDERSTANDING FREE- MARKET CAPITALISM
Competition within Free Markets
Reality Entertainment, Inc is a major producer of reality TV programming. The company faces fierce competition from three other major producers of similar shows. Today, Reality Entertainment and its three rivals control almost the entire reality TV programming. Their market environment is call an oligopoly.
See Learning Goal 2: Explain what capitalism is and how free markets work.

25. Free Market Benefits and Limitations
Benefits and Limitations of Free Markets
Benefits:
It allows for open competition among companies. Business must provide customers with high-quality products at fair prices with good service.
Provides opportunities for poor people to work their way out of poverty.
I am a poor person.
Limitations:
See Learning Goal 2: Explain what capitalism is and how free markets work.
People may start to let greed drive them. Criminal charges brought against some big businesses in banking, oil, accounting, telecommunications, insurance, and pharmaceuticals indicate the scope of the potential problem.

26. Entrepreneurs run smaller businesses. Citizens are highly taxed.
Socialism
UNDERSTANDING SOCIALISM
Socialism -- An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people.
Entrepreneurs run smaller businesses.
Citizens are highly taxed.
Government is more involved in protecting the environment and the poor.
This economy promotes social equality.
See Learning Goal 3: Compare socialism and communism. 26

27. Benefits and Limitations of Free Markets
Socialism Benefits
Benefits and Limitations of Free Markets
Social equality- It comes about because the government takes income form wealthier people, in the form of taxes, and redistributes it to poorer people through various government programs.
Free education.
Free healthcare.
Free childcare.
Longer vacations.
Shorter work weeks.
Generous sick leave.
See Learning Goal 3: Compare socialism and communism. 27

28. The Negative of Socialism
The Negative Consequences of Socialism
Few incentives for business people to take risks.
Brain Drain: Because of the high tax rates in some nations are so high, (some reach 85%), some of a country’s best and brightest workers (i.e. doctors, lawyers and business owners) move to capitalistic country’s. This loss of the best and brightest people to other countries is called a Brain Drain.
Fewer inventions and innovations because the reward is not as great as in capitalistic countries.
See Learning Goal 3: Compare socialism and communism.

29. UNDERSTANDING SOCIALISM
While touring Greece last year, Angela landed in the hospital for five days when she was run-over by a careless motorcyclist. To no avail, her son and daughter who were also on the trip tried frantically to pay for the medical care required to set her broken bones. There she lay with no casts, limbs hanging until the state’s doctor deemed it her turn for attention. In nations where medicine is socialized, individuals often wait for several years for proper medical attention.
See Learning Goal 3: Compare socialism and communism. 29

30. UNDERSTANDING SOCIALISM
Socialism is an economic and political system where major industries are owned and operated by the government. Although it provides wider coverage of medical services for persons who may not normally be able to afford medical care, there are often complaints by persons who wait a long time for service.
See Learning Goal 3: Compare socialism and communism. 30

31. Communism
UNDERSTANDING COMMUNISM
Communism -- An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.
Prices don’t reflect demand which may lead to shortages of items, including food and clothing. The government must guess what the people need.
See Learning Goal 3: Compare socialism and communism.
Most communist countries today suffer severe economic depression and citizens fear the government. 31

32. Two Major Economic Systems
THE TREND TOWARD MIXED ECONOMIES
The nations of the world have largely been divided between those that followed the concepts of capitalism and those that adopted the concept of communism or socialism. We can now contrast the two major economic systems as follows:
Free-Market Economies -- The market largely determines what goods and services are produced, who gets them, and how the economy grows.
See Learning Goal 4: Analyze the trend toward mixed economies.
Command Economies -- The government largely determines what goods and services are produced, who gets them, and how the economy will grow.

33. Mixed Economics
THE TREND TOWARD MIXED ECONOMIES
Mixed Economies -- Some allocation of resources is made by the market and some by the government. Like most other nations of the world, the United States has a mixed economy. The U.S. government has now become the largest employer in the country which means there are more workers, in the public sector (government) than in any of the major businesses in the United States.
Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems.
See Learning Goal 4: Analyze the trend toward mixed economies. 33

34. Mixed Economics Communist governments are disappearing.
THE TREND TOWARD MIXED ECONOMIES
Mixed Economics
Communist governments are disappearing.
Socialist governments are cutting back on social programs, lowering taxes and moving toward capitalism.
Capitalist countries are increasing social programs and moving more toward socialism.
See Learning Goal 4: Analyze the trend toward mixed economies.
2-34

35. CHINA’S CHANGING ECONOMY (Reaching Beyond Our Borders)
THE TREND TOWARD MIXED ECONOMIES
CHINA’S CHANGING ECONOMY (Reaching Beyond Our Borders)
China’s economy is growing two or three times faster than the U.S.
China is worried about inflation and a possible housing crash.
Though known for its socialist and communist foundations, the adoption of capitalist principles is credited for some of the growth.
See Learning Goal 4: Analyze the trend toward mixed economies.
China has replaced Japan as the world’s #2 economy. The rise of the Chinese economy also creates opportunities for companies from other countries to sell goods and services in China.
2-35

36. UNDERSTANDING THE U.S. ECONOMIC SYSTEM
The following sections will introduce the terms and concepts that you, as an informed citizen, will need to understand the issues facing government and business leaders in the United States.
United States
Three major indicators of economic conditions are (1) the gross domestic product (GDP), (2) the unemployment rate, and (3) price indices.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle. 36

37. Gross Domestic Product
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Gross Domestic Product (GDP) -- Total value of final goods and services produced in a country in a given year. As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).
When the GDP changes, businesses feel the effect.
The high U.S. GDP (about $14 trillion) is what enables us to enjoy a high standard of living.
Canada
Ron’s Place
United States
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Mexico 37

38. Gross Domestic Product
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
The next wave of marketable innovations may involve new ways to produce and conserve energy. If we can turn new technology into marketable products and services that produce energy to run our businesses and homes, the U.S. could see a surge in output of goods and services. The Department of Economic Development would document this surge by measuring the Gross Domestic Product.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle. 38

39. Unemployment UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Unemployment Rate – Refers to the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks.
Four Types of Unemployment
Frictional- refers to those people who have quit work because they didn’t like the job, the boss, or the working conditions and who have not found a new job.
Structural- caused by the restructuring of the firms.
Cyclical- caused by recession or a similar downturn in the business cycle.
Seasonal- occurs where demand for labor varies over the year as with the harvesting of crops.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
While the term unemployment seems simple enough, the Bureau of Labor Statistics (BLS) has a very specific definition. According to the BLS unemployment is the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks. If that was not confusing enough there are four types of unemployment which students are often surprised to discover. 39

40. U.S. Unemployment Rate UNDERSTANDING THE U.S. ECONOMIC SYSTEM
* As of June 2011
9.1%
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
The unemployment rate in the United States over the past 50-plus years has been as low as 3.9 percent, but more recently has climbed past 10 percent. Although the unemployment rate is climbing in the United States, it still has a long way to go to reach the unemployment rate in Zimbabwe (80 percent).
Source: U.S. Bureau of Labor Statistics, June 2011.
2-40

41. UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Inflation
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Price indices help gauge the health of the economy by measuring the levels of inflation, disinflation, deflation, and stagflation.
Inflation -- The general rise in the prices of goods and services over time.
Disinflation -- When the price increases are slowing (inflation rate declining). Occurred throughout the United States in the 1990s.
Deflation -- Prices are declining because too few dollars are chasing too many goods. People cannot buy all the products.
Stagflation -- Economy is slowing but prices are going up. Some economists fear the United States may face stagflation in the near future.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
When discussing inflation, disinflation, deflation and stagflation, introducing the term hyperinflation is particularly interesting to students. Historical examples of countries suffering from hyperinflation post-World War I and currently Zimbabwe bring this topic to life. 41

42. The Consumer Price Index
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Consumer Price Index (CPI) -- Monthly statistics that measure the pace of inflation or deflation.
The government computes the costs of goods and services (housing, food, apparel, medical care, etc.) to see if they are going up or down.
The wages, rent/leases, tax brackets, government benefits and interest rates of some citizens are based upon the CPI.
A decrease in the CPI indicates that an economy is experiencing deflation.
The Producer Price Index (PPI) – Measures price at the wholesale level.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
After discussing hyperinflation in the previous slide students can appreciate the importance of monitoring a nation’s inflation rate to prevent it from spiraling out of control. As inflation is increasing it acts as a hidden tax increase eroding the purchasing power of the population. 42

43. Productivity on the United States
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Productivity on the United States
Productivity in the U.S. has risen due to the technological advances that have made production faster and easier.
Productivity in the service sector grows more slowly because of fewer technologies.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
2-43

44. Productivity in the Service Sector
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
The higher the productivity, the lower the costs of producing goods and services. This helps lower prices.
New technology adds to the quality of the services provided but not to the worker’s output.
A new form of measurement needs to be created to account for the quality as well as the quantity of output.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

45. Four Phases of Long-Term Business Cycles:
The Business Cycles
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Business Cycles -- Periodic rises and falls that occur in economies over time.
Four Phases of Long-Term Business Cycles:
Economic Boom – Business is booming.
Recession – Two or more consecutive quarters of decline in the GDP. Brings high unemployment, increased business failure, and an overall drop in living standards.
Depression – A severe recession in the 1930s.
Recovery – When the economy stabilizes and starts to grow. This leads to an Economic Boom.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Yes, it is true that a recession is two or more consecutive quarters of contracting gross domestic product, but students will be interested in knowing that for a recession to be officially labeled a recession it must be declared by the National Bureau of Economic Research. Their website, provides numerous resources to further explain this part of the business cycle. 45

46. UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Fiscal Policy
Stabilizing the Economy through Fiscal Policy
Fiscal Policy -- The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Tools of Fiscal Policy:
- Taxation- High tax rates tend to slow the economy because they draw money away from the private sector and put it into the government. High tax rates may discourage small-business ownership because they decrease the profits businesses can earn and make the effort less rewarding.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
Government Spending- On highways, social programs, education, defense, and so on. 46

47. Stabilizing the Economy through Fiscal Policy
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Stabilizing the Economy through Fiscal Policy
Fiscal Policy
Fiscal Policy – Senator Gong Lee is alarmed at the state of the economy. Unemployment is high and GDP is low. Senator Lee wants Congress to take action to increase its expenditures and cut taxes in order to stimulate the economy. The actions called for by Senator Lee are examples of Fiscal Policy.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
May I help you, please? 47

48. National Deficits, Debt and Surplus
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
National Deficit -- The amount of money the federal government spends beyond what it gathers in taxes. The 2008 federal budget, had a projected deficit of $407 billion. The deficit is expected to rise to over $1 trillion for several years. Such deficits increase the national debt.
National Debt -- The sum of government deficits over time. Recently, the national debt was about $10 trillion and was growing at a rate of abut a $1.78 billion a day. Medicare and the unfunded debt of Social security are on the top of the list.
National Surplus -- When government takes in more than it spends.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

49. National Deficits, Debt and Surplus
UNDERSTANDING THE U.S. ECONOMIC SYSTEM
National Deficits, Debt and Surplus
Stabilizing the Economy through Fiscal Policy
National Debt – While scanning the movies section in your local online newspaper, you click on the business section by mistake. While you’re there, you quickly scan a report that says government spending will again exceed tax revenues in the current year. This means that the total national debt is likely to increase.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

50. UNDERSTANDING THE U.S. ECONOMIC SYSTEM
Using Monetary Policy to Keep the Economy Growing
Monetary Policy
Monetary Policy -- The management of the money supply and interest rates by the Federal Reserve Bank (the Fed). The Federal Reserve System operates as a semi-private organization not under the direct control of the government.
The Fed’s most visible role is increasing and decreasing or lowering interest rates.
When the economy is booming, the Fed tends to increase interest rates. This makes money more expensive to borrow. Businesses thus borrow less, and the economy slows ad business people spend less money on everything they to need grow, including labor and machinery.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
- When the economy is in a recession, the Fed tends to decrease the interest rates 50

51. The End!
See Learning Goal 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.
3-51 51