Coping with Economic Challenges

Cause of Economic Problems Inflation If prices increase faster than wages, people can’t buy as much Hurts the purchasing power of the dollar, standards of living may decrease Unemployment Unemployed cannot pay bills or taxes, buy fewer goods and services Sometimes have to seek government assistance, which cost taxpayers money Recessions Production, spending, and consumer demand decline during recessions Businesses produce less which leads to higher unemployment Unemployment decreases individual savings, which hurts the banks who lend money to businesses

Money & Loans Some economists believe a major cause of inflation is having too much money in circulation Additional money spent causes prices to rise Some economists argue the banks make too many loans People and businesses will spend that money on goods and services, same effect as increasing the money supply Businesses that borrow and expand too rapidly may produce more than they can sell Must slow production, contributing to a recession

Government & Consumer Spending Some argue the government is borrowing and spending too much Borrowing puts more money into the economy, helps raise prices, and adds to the national debt Increased taxes needed to pay this debt take money out of the hands of individuals Consumers share responsibility for the country’s economic difficulties Spending or borrowing money for things we can’t afford affect consumer savings

Productivity Productivity refers to the amount a worker produces per hour Rising productivity leads to higher wages, higher profits, lower prices Productivity in other countries has increased faster than in the U.S. Means more cheaper foreign goods that American businesses have to compete with Many American businesses find the only way to increase productivity is to modernize their factories Costs millions, jobs go to automated machines/robots instead of actual people Because of these costs, many businesses have relocated overseas to reduce their costs and increase productivity- this results in thousands of jobs lost

The Government’s Response Changing Fiscal Policy Reducing taxes gives people more money to spend and save Increased consumer spending (because of lower taxes) encourages businesses to produce more, which leads to more jobs Increased consumer savings (because of lower taxes) gives banks more money to lend to expanding businesses Government increases its own spending Buys goods and services, hires people to work for the government May give larger payments to impoverished or unemployed

The Government’s Response Changing Monetary Policy FED may increase money supply or lower interest rates banks pay to the FED Low interest rates encourage businesses to expand In a boom, the FED will take the opposite actions Federal govt. will raise taxes and reduce spending FED will increase the interest rate and make it harder for banks to lend out money

Other Ways to Help the Economy Reduce Government Spending Govt. can reduce wasteful spending/halt unnecessary programs Govt. could try to spend only the money it receives in taxes to help with borrowing and the national debt Increase Savings Consumers can reduce spending and save more of their income Buy American-Made Products Helps American businesses prosper Preserves jobs for American workers or can create new jobs Increase Productivity Businesses should try to operate more efficiently If workers increase their productivity, they may earn higher wages without contributing to inflation (wealth should not increase faster than productivity)

? What are three major causes of economic problems? How does the money supply and loans contribute to economic problems? How does government and consumer spending contribute to economic problems? What are some of the challenges that modernization presents to business owners? List three ways in which consumers can help the economy grow.