1. Economic Conditions
Change
Intro to Business
2-2

2. The Business Cycle
All economies experience good and bad economic periods
This economic shift between good and bad economic conditions is called the business cycle.
Business cycles have four phases
Prosperity
Recession
Depression
Recovery

3. Prosperity
Prosperity is a period in which most people who want to work are working, wages are high, and the rate of GDP growth increases.
Demand for goods and services is high.
Prosperity is usually the high point of the business cycle.

4. Recession
Occurs when the economy slows down from the prosperity phase.
A recession is a period in which demand begins to decrease as production decreases, unemployment begins to rise, and GDP growth slows for two or more quarters,
May not be serious, but often signals trouble for workers in related businesses.
Eventually weakens economy and total output declines in the next quarter.

5. Depression
Occurs when a recession deepens and spreads throughout the entire economy.
Depression is a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures.
GDP falls rapidly.
Has not occurred in the US since the 1930’s.

6. Recovery
Recovery is the phase in which unemployment begins to decrease, demand increases, and GDP begins to rise.
Can occur quickly or slowly
Consumer confidence increases
Returns the country to the prosperity phase.

7. Consumer Prices Buying power of money changes over time.
Technology becomes less expensive over time
Amounts of an item may be sold for the same price in smaller quantities.
Changes may occur as either inflation or deflation.

8. Inflation An economic issue that all developed nations must deal with.
Inflation is an increase in the general level of prices
Decreases buying power of the nation’s currency.
Most harmful to families living on fixed incomes.
Retirees and others on fixed income cannot afford as many goods or services.

9. Causes of Inflation
When demand for goods or services in greater than supply.
Wages tend to rise during inflation, but prices usually rise faster.
Typically considered harmful, as consumers must earn more money to maintain the same standard of living.
If wages increase too quickly, business tend to hire fewer workers, raising unemployment.

10. Measuring Inflation Inflation rates vary.
Mild inflation (around 2 or 3 percent) can stimulate economic growth as prices increase faster than wages, allowing the producer to hire more workers.
The most watched measure of inflation in the US is the Consumer Price Index (CPI).
A price index is a number that compares prices in one year with prices in some earlier base year.
Cost of living inflation may change differently than the products used to calculate inflation with the CPI.

11. Deflation Deflation is the opposite of inflation.
Deflation means a decrease in the general level of prices.
Usually occurs in recession and depression.
Even though prices drop, people tend to have less money to afford them.
Occurred most significantly during the Great Depression
Many technological products are deflating in price as technology advances.

12. Cool Web Resources http://www.westegg.com/inflation/

13. Interest Rates Interest rates represent the “cost of money.”
Interest rates have a strong influence on business activities.
Companies and governments that borrow money are affected by interest rates.
Consumers are affected by interest rates.
Interest on loans reflects current interest rates, as to earnings from savings and investments.

14. Types of Interest Rates
There are many different types of interest rates that represent the cost of money in different settings.
The prime rate is the rate banks make available for their best customers, such as large corporations
The discount rate is the rate financial institutions are charged to borrow funds from Federal Reserve banks.
The T-bill rate is the yield on short-term (13 week) U.S. government debt obligations.

15. Types of Interest Rates (cont.)
The treasury bond rate is the yield on long-term (20 year) U.S. government debt obligations.
The mortgage rate is the amount individuals pay to borrow for the purchase of a new home.
The corporate bond rate is the cost of borrowing for large U.S. corporations.
The certificate of deposit rate is the rate for time deposits at savings institutions.

16. Changing Interest Rates
The cost of money changes every day due to various factors.
The supply and demand for money is the major influence on the level of interest rates.
As amounts saved increase, interest rates tend to decline.
When borrowing by consumers, businesses, and government increases, interest rates are likely to rise.
See assignment in G:drive (Banks)