Business Cycle & Government interaction in the economy

I. GDP A. Gross Domestic Product (GDP) 1.Dollar value of all final goods and services produced w/in a country’s borders 1.Intermediate goods- used in the production of final goods 2.Final goods and services- products in the form sold to customers

B. Gross National Product (GNP)- all of the goods and services produced by Americans includes sales and investments overseas by American companies and individual.

C. Consumer Price Index (CPI) measures changes in the price level of consumer goods and services purchased by households not including food and fuel (because it is too volatile)consumer goodsservices 1.The annual percentage change is used to calculate inflation the rise in the prices of goods and services in an economy over a period of time 2.CPI is used to determine the real value of wages salaries, pensions

II. Phases in Business Cycle -Changes in GDP above or below normal levels. Four Phases: A. Peak- when GDP stops rising, the height of economic expansion B. Contraction- an economic decline marked by falling GDP, rising unemployment

1.Recession- prolonged contraction (6-18 months) 2.Depression- long and severe recession with high unemployment, low output C.Trough- economy at lowest point in economic contraction

D. Expansion 1.Period of economic growth as measured by rise in GDP 2.Business prosperity, falling unemployment

E.Fiscal policy- gov’t economic policy a.Common fiscal policy in a crisis is lower taxes and increase spending, esp. public transfer payments (entitlements) b.Fiscal :Latin for Basket

III. Unemployment & Poverty 1. Cyclical Employment- unemployment rises during economic downturns and falls when economy improves 2. Full Employment- unemployment rate 4-6% 3. Underemployment- people working at a job in which they are overqualified or part-time

4.Poverty rate- percentage of people who live in households below the poverty threshold (the income a person earns is not sufficient to support a household) 1.One person: $10,590 2.Two adults w/two children: $21,027 for dependents

IV. Government Interventions 1. Entitlement programs 1.Medicaid, Food Stamps, WIC(pays for nutrition and healthcare for low income women and children, FDC payments, federal jobs programs & training 2. Gov’t subsidized loans for college education 3. Federal Reserve 1.lowering interest rates so that companies can expand businesses & hire more workers 4. Taxation ◦ Progressive tax rate & Earned Income tax credit (EITC) this gives tax credits and cash payments to qualified workers.

V. Causes of Great Depression A. Investing stocks value $27 billion, stocks value $87 billion 2.Climb encouraged speculation- making investments with borrowed money in hopes of getting big return

B. Signs of Trouble from ( ) 1.Large gap between rich and poor 2.Farmers and workers suffering financially once increased from WWI goes away 3.People going into debt buying consumer goods 4.Overproduction of consumer goods -> Surpluses -> Fall in prices

C. The Crash 1.Overpriced stocks hit peak then began to fall 2.Brokers demand repayment from speculators 3.Black Tuesday (Oct 29, 1929), record 16.4 million shares sold

D. Aftermath 1.Falling prices -> deflation -> unemployment 2.Inaction from the Federal Reserve Bank (currency tied to gold) 1.FDR’s “New Deal” a.Major increase in social programs, public works, gov’t spending b.Stopped contraction but not full recovery 2.WWII- economic recovery

Questions to answer: Ticket out What is the difference between a depression and a recession? What are two advantages of a growing economy? In what way does the representation of the business cycle, the wave graph, fail to represent an actual business cycle? Why is fiscal policy an important economic tool?

Activity Refer to pages in your textbook. Look at the graph illustrating US Business Activity since What economic situation often follows a war? 2. What percentage level of economic activity do all times of prosperity have in common? 3. According to this graph, how does the economy fare during times of war?