Chapter 6 The Health of the Economy

Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of economic conditions on consumers; Discuss factors that affect the state of the economy; and Explain measurements used to gauge the state of the economy.

Business Cycle – the ups and downs of the economy Peak Expansion Contraction Trough

Types of Business Cycles Contraction – business activity slows down If the contraction last long enough and is deep enough, the economy goes into recession Trough – at the lowest point in the cycle, business activity levels off Expansion - the economy begins to recover People spend more money and open more businesses, demand brings more production of goods and services and employment rises Peak – a period of prosperity marks the highest point of the cycle Eventually, however a contraction occurs and the cycle starts over again

Lasts about 6 months  1 year Recession – is a period of significant decline in the economy Lasts about 6 months  1 year The economy produces more than people can consume Businesses don’t make money and have to lay off workers Workers don’t have money and therefore cannot spend Recession can lead to DEPRESSION

Depression – a major economic slowdown, Depression – a major economic slowdown, longer lasting and more serious The Great Depression – dominated the world economy in the 1930’s Some believe that the stock market crashing had very little to do with it, they believe it was poor policy decisions by the government Lasted until WWII

Inflation – prolonged rise in the price of goods and services It affects consumers by reducing their purchasing power When prices rise sharply, your dollar buys fewer goods and services than before

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 money Inflation can also benefit someone who has borrowed money at a fixed interest rate that is lower than the rate of inflation

Factors Affecting Ups and Downs Consumer Confidence Psychological factor – based on the feelings of the consumer Technological Innovation Spurred by inventions Can transform the economy, the workplace, and the culture Government Policies Can either help or hurt the economy War Government pumps billions of dollars into the economy to support troops in need of goods and services

Measuring the Economy’s Performances Economic Indicators – measurements used to monitor the health of the economy Gross Domestic Product (GDP) – is the total dollar value of goods and services produced in a country during the year Unemployment Rate High unemployment rate means the economy is ailing Consumer Price Index (CPI) – measures the change in prices over time of a specific group of goods and services Market Basket – 200 categories of goods and services that average household uses Each month the Bureau of Labor Statistics reports the percentage change in CPI

Local, National, and Global Economics Conditions Affecting the Economy Weather Natural disasters Population shifts Availability of workers Local government policies Fortunes of local businesses

Section 6.2 Deficits and Debt Objectives Distinguish between a budget surplus and a budget deficit; Identify reasons for deficit spending by governments; and Analyze the effects of the national debt on consumers.

The Budget Process   Budget – is an estimate of anticipated income and expenses for a certain period of time. It is created by federal, state, and local governments It 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 revenue The house approves final budget, then becomes law

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 opposite   Deficit Spending – the practice of spending more money than was received in revenue Budget Deficit – the amount by which spending exceeds revenue

Various Causes of Budget Deficits: War Recession Policy decisions by Congress and President   National Debt – (Public Debt) total amount of money that the federal government owes

Government Also Needs to Borrow Money Selling various types of securities: Saving Bonds Treasury Bills

What’s the Impact? Some are not worried about the debt, because it has decreased since WWII Some are worried, because the interest takes up about 10-20% of the federal budget each year  

Section 6.3 Stabilizing the Economy Objectives Compare and contrast fiscal and monetary policy; Explain the role of the Federal Reserve System; and Analyze how the Fed’s actions affect consumers.

Stabilizing the Economy Section 6.3 Stabilizing the Economy Two Types of Policies Fiscal Policy – refers to the federal government’s use of taxing and spending policies to help stabilize the economy They raise or lower taxes and increase or decrease government spending Can take months before it affects the economy Carried out by the President and Congress

2. Monetary Policy - to regulate the money supply Money Supply – total amount of money in circulation at any given time Carried out by nations central bank

The Federal Reserve System – (Fed) is the central bank of the U.S. Provides financial services to the banking industry and government It regulates banks to make sure that they follow the law Primary responsibility is to set Monetary Policy Federal 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

The Fed and the Money Supply Increase money supply, credit becomes more available and less costly, which helps consumers and businesses to spend more Decrease money supply, credit becomes harder to get and more expensive, which causes consumers and businesses to spend less

Fed can manipulate the money supply in three ways: Engage in open market operations Raise and lower the discount rate Adjust the reserve requirement

Open Market Operations Most frequently used tool in selling or buying government securities – stocks, bonds, and other financial assets in the open market Decreased money supply, government sells holdings of government securities, buyers will pay for these and therefore takes money out of the circulation

Opposite affect cause them to buy Opposite affect cause them to buy securities, which puts money back into circulation Federal Funds Rate – this is the interest rate at which banks lend money to one another overnight Not controlled by the Fed, but strongly influenced Tends to trigger changes in the interest rate that financial institutions charge consumers and businesses

The Discount Rate Sometimes banks have to borrow money from the Fed to encourage them to give discounts to consumers and businesses Discount Rate – interest rate that banks pay to the Fed. The direct affect of the discount rate on money supply is usually very small

Reserve Requirements Reserve Requirements - The % of a bank’s deposit that it must keep on hand Holding money in reserve helps take money out of circulation.

Effects on Consumers What you’ll pay for goods and services Your ability to get credit and the interest rates you will pay What you will earn in interest Your job stability and the wages you are paid