1. Economic Instability
Chapter 14

2. Economic Cycles The economy is up and down throughout our history
A good economy always comes to a halt before it takes off again
The GDP is the most important factor in determining if the economy is good or bad

3. Phases of the Business Cycle
Two phases of the business cycle:
1) recession = period during which the real GDP declines for two quarters/6 months
It begins when the economy reaches a peak (high point of GDP)
It ends when the economy reaches a trough (low point of GDP)

4. 2) expansion = period of recovery from a recession
It begins when the GDP reaches its low point and begins to turn around
If a recession becomes very severe, it could become a depression = state of the economy with large numbers of people out of work, acute shortages and excess capacity in manufacturing plants
The Great Depression in the 1930’s was the only depression in the 20th century

5. Causes of the Great Depression
Several factors brought on the Depression:
1) big gap between rich and poor
Poor couldn’t help economy because they had no money to spend
Rich didn’t help economy because they often used it in the stock market
2) Too much credit (borrowing)

6. 3) Too many European countries not repaying loans or getting loans
4) High tariffs on imports hurt world trade
5) too many consumer goods produced
6) overproduction of agriculture = falling prices

7. The Great Depression Stock Market crashed on Oct. 29, 1929
Many went from rich to poor in days
Even people with no stocks were hurt because their savings were in banks that failed
Between 1929 and 1933, GDP fell from $103 billion to $55 billion
Employment rose to 25%
Money supply fell by 1/3

8. At first gov’t did nothing, expecting the crisis would solve itself
When FDR was elected, he instituted the New Deal which put millions to work in public works projects
This provided relief for people but did NOT end the Depression
The massive amount of gov’t spending during WWII ended the Depression

10. Unemployment
Unemployed = people who try to find work, and worked less than one hour for pay
Unemployment rate = the # of unemployed divided by the total number of civilian laborers
Unemployment rates rise dramatically in recessions and drop slowly afterwards

11. Kinds of Unemployment
Frictional unemployment = workers who are between jobs for some reason
These workers don’t suffer much economic hardship
Structural unemployment = occurs when a big change in the operations of the economy reduces the demand for workers
Changes in technology or consumer demand can bring this about
Industries may change the way they do business

12. Cyclical Unemployment = unemployment directly related to swings in the business cycle.
Example: during a recession, people don’t buy as many consumer goods
As a result, some industries lay off workers until the economy recovers
Seasonal Unemployment = unemployment resulting from changes in the weather or changes in demand for certain products.
Example: home builders don’t work as much in cold weather

13. Technological Unemployment = unemployment caused when workers with less skills, talents or education are replaced by machines
Example: numbers of bank tellers reduced because of automated teller machines
Full Employment = the lowest possible unemployment rate – reached when it drops below 4.5%
Hard to maintain because of business cycles

14. Inflation
Inflation = rise in prices related to an increase in the supply of money, resulting in a loss in the value of currency
Terms that describe the severity of inflation:
Creeping inflation = in the range of 1 to 3% per year
Galloping inflation = as high as 100 to 300%
Many Latin American and former communist countries experience this
Hyperinflation = in the range of 500% or more
Very rare and signals a total monetary collapse
Record set by Hungary during WWII
828 octillion (27 zeros) pengos equaled 1 prewar pengo

15. Causes of Inflation
1) when all sectors of the economy try to buy more goods and services than the economy can produce
2) huge deficit spending on the part of the government
3) rising input costs, especially labor, drive up cost of products for manufacturers
4) increase in cost of nonlabor inputs
Example: rise in prices of a barrel of oil

16. 5)self-perpetuating spiral of wages and prices
Example: higher prices force workers to ask for higher wages
In turn, producers try to recover that cost with higher prices
It creates a spiral
6) most popular explanation is excessive monetary growth
Occurs when the money supply grows faster than the GDP
Extra money created by the Fed will increase some groups purchasing power
Spending that money drives up prices

17. Consequences of Inflation
1) most obvious effect is the dollar buys less
The purchasing power of the dollar falls as prices rise so the dollar loses value over time
2) inflation can cause people to change their spending habits which disrupts the economy
3) it tempts some people to speculate heavily in an attempt to take advantage of a higher price level
Example: buying luxury items like diamonds and gemstones because they may increase in price

18. 4) it alters the distribution of income
During long periods of inflation, lenders are hurt more than borrowers
Loans made earlier are repaid in inflated dollars
Example:
A person borrows money from you to buy bread at .50 cents a loaf
They borrow $100 dollars so they can buy 200 loafs
If inflation sets in and the price of a loaf rises to $1 by the time the loan is repaid to you
Then when you get your money back, you could only buy 100 loaves for the same amount

19. Reasons for Income Inequality
There are several reasons the incomes of various groups may be different
1) Education:
Usually people with higher education make more income because they have a higher level of skill
2) Wealth:
Income varies because some people have more wealth than others

20. 3) Discrimination: It is illegal, but still takes place
Women may not be promoted to executive positions
Unions may deny ethnic minorities membership
When this occurs, women and men are driven into other labor markets where oversupply drives down wages

21. 4) Ability: 5) Monopoly Power: Some people have a natural ability
Like athletes and movie stars who make millions
5) Monopoly Power:
The monopoly power that some groups hold
Unions get higher wages for members
American Medical Association limits enrollment in med schools to limit amount of doctors

22. Poverty = relative measure that depends on prices, the standard of living and a low measure of income
In US, income must be below $23,550 for a family of four
Poverty rate was 12.5% when Obama took office
It has been 15% for 3 years now
In 2013, almost 50 million Americans lived in poverty
More than 2/3 are white and almost ¼ are African American
Poverty

23. A major reason for the continued high poverty level is the growing gap in the distribution of income
There are several causes:
1) change in the economy as industry changes from producing goods to services
Wages are lower in grocery stores and amusement parks
2) gap between well-educated and poorly educated workers
1990’s wages for highly skilled workers soared while less skilled wages stayed the same

24. 3) decline of unions (especially among low-skilled workers)
Many now have to work elsewhere for less pay
4) changing structure of the American family
There has been a shift from two-parent families to single-parent families
This usually lowers incomes

25. Antipoverty Programs
The government has created welfare programs to help the needy
Welfare = economic and social programs that provide regular help from the gov’t or private agencies because of need
Temporary Assistance for Needy Families – 1997 – families get cash payments because of death, continued absence or permanent disability of a parent
Supplemental Security Income – cash payments to blind or disabled over 65

26. General assistance programs do not give cash
Food Stamps = gov’t issued coupons that can be redeemed for food
Medicaid = federal-state medical insurance program for low-income people
Social service programs:
Child abuse prevention
Foster care
Job training

27. Enterprise Zones: Workfare Programs:
These are areas where companies can locate free from some local, state and federal tax laws and other operating restrictions
Usually in run down or very low income areas
Workfare Programs:
Many state and local gov’ts require people who receive welfare to provide labor in exchange for benefits
Sanitation crews
Highway crews