1. Business Cycle: The Role of Government
Goals, Laws, Authorities, and Policies

2. Business Cycles
Business cycles are fluctuations in the level of economic activity, alternating between periods of recession and prosperity.
Peak
Peak
Expansion
Peak
Expansion
Contraction
Trough
Contraction
Trough

3. Business Cycles Business cycles are comprised of four phases:
Recession
Rate of growth in GDP falls, unemployment increases, excess capacity increases, inflationary pressures decrease, and profits fall.
Trough
Expansion
Rate of growth in GDP rises, unemployment decreases, excess capacity decreases, inflationary pressures build, and profits rise
Peak

4. A Brief History of Business Cycles: The USA
Expansions
1945:4-1948:4 13
1950:1-1953:2 14
1954:3-1957:3 13
1958:2-1960:1 8
1961:1-1969:3 35
1971:1-1973:4 12
1975:2-1980:1 20
1980:3-1981:3 5
1982:4-1990:3 32
1991:3-2001:
Recessions
1949:1-1949:4 4
1953:3-1954:2 4
1957:4-1959:1 2
1960:2-1960:4 3
1969:4-1970:4 5
1974:1-1975:1 5
1980:2-1980:2 1
1981:4-1982:3 4
1990:3-1991:2 4
2001:1-

5. Economic Stabilization: Policies
Economic policies used by the federal government to counter the cyclical fluctuations in economic activity
Monetary Policy
Uses changes in the rate of growth in the money supply to bring about changes in the level of economic activity
Fiscal Policy
Uses changes in government spending and taxes to bring about changes in the level of economic activity.

6. Economic Stabilization: Goals
Price Stability
Maintenance of an unchanged general level of prices over time.
Full Employment
Full utilization of all available labor and capital.
Economic Growth
Growth of real output over time.

7. Economic Stabilization: Laws
The Federal Reserve Act (1913)
Establish a central bank, furnish elastic currency, provide a lender of last resort, supervise the banking system.
The 1946 Employment Act
Formulate and execute policy to promote maximum employment, production and purchasing power.

8. Economic Stabilization: Laws
The 1978 Humphrey-Hawkins Act
Provide employment and price objectives as well as money growth targets.
The 1980 Monetary Control Act
Deregulate the banking system.

9. BUDGET THE PRESIDENT CONGRESS FEDERAL RESERVE FEDERAL AGENCIES TAXES
SPENDING
MONETARY
POLICY
FISCAL
POLICY
REGULATORY
POLICY

10. Economic Stabilization: The Authorities
The Congress
House of Representatives
Elected every 2 years: 435 Members
Senate
Elected every 6 years: 50 Members
The President of the United States
Elected every 4 years
The Federal Reserve

11. Stabilization Authorities: Congress
Congress implements the nation’s fiscal policy.
Congress produces the government’s annual budget.
Congress determines spending levels for the government.
Congress enacts tax laws for the nation.

12. Stabilization Authorities: President
The President and his staff prepare an annual economic report that reviews the state of the economy.
The President submits an annual budget, but Congress has fiscal authority.
The President must influence members of Congress to adopt his budget priorities.

13. Stabilization Authorities: The Fed
The Federal Reserve is the central bank of the United States.
The Federal Reserve was established by an Act of Congress in 1913.
It is an independent organization that reports to Congress, but does not receive any financing from the government.

14. THE FEDERAL RESERVE SYSTEM
Board of Governors
(7 appointed members)
Determines reserve
requirements and
approves changes in the
discount rate.
Supervisory and regu-
latory responsibilities
over member banks and
holding companies.
Oversight of Federal
Reserve Banks.
Federal Reserve Banks
(12 District Banks)
Handle reserve balances
for banks.
Furnish currency.
Collect, clear , & transfer
funds.
Handle U.S. government
debt and cash balances.
Establish discount rate
and furnish loans at
discount window.
Federal Open Market
Committee
(12 members)
Meets 8 times a year in
Washington, D.C.
Formulates monetary
policy directives
implemented through
open market operations.
Reserve
Requirements
Discount
Rates
Open Market
Operations

15. The 12 Federal Reserve Banks
Minneapolis
New York
Boston
Chicago
Philadelphia
Cleveland
Washington
San Francisco
St. Louis
Richmond
Atlanta
Kansas
City
Dallas