1. 1. The Business Cycle (recessions & unemployment) 2. Unemployment Rate UNIT 3: Let’s briefly look at some Macro concepts.

2. In Units 1 & 2 we learned the beliefs, systems & problems present in economics…. …how do we go about studying the impacts of all these things? …how do we go about studying the impacts of all these things?

3. Supply & Demand We look at things such as… Prices Business Structures Unemployment Interest Rates Budgeting Government Policies GDP & Business Cycles GDP & Business Cycles

4. The Business Cycle (the good times, the bad times, & how unemployment factors in to the cycle)

5. The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. 1. Growth (expansion) 2. Peak (highest point of cycle, means that the unemployment rate is at its LOWEST level) 3. Recession (contraction - or slow down of the economy) 4. Trough (lowest point of cycle, means that the unemployment rate is at its HIGHEST level) 5. Recovery (productivity increases and the total products produced in a nation increase) What is the Business Cycle? five stages The five stages of the business cycle are:

6. Business Cycle Remember the stages of the business cycle: Growth, Peak, Recession, Trough, Recovery

7. Business Cycle A TROUGH means that the economy is doing poorly and the Unemployment Rate is at its HIGHEST level How does this cycle relate to unemployment rates? A PEAK (or BOOM) means that the economy is doing very well and the Unemployment Rate is at its LOWEST level

8. Business Cycle: Business Cycle: What is a Recession? Defined: A significant decline in economic activity spread across the economy 1. We are in a recession if there are two consecutive quarters (6-months) of (-)NEGATIVE economic growth. Otherwise known as a decline in a country's GDP. 2. It effects many variables, such as industrial production, unemployment, income levels, and wholesale-retail trade. 3. Recession is a normal (yet unpleasant) part of the business cycle. 4. A recession generally lasts from 6 to 18 months. Characteristics of a RECESSION:

9. QUESTION:How is production effected by recession and peaks? QUESTION: How is production effected by recession and peaks? GDP The Business Cycle & Unemployment Graphical Relationship Remember that unemployment will go up during stages of GDP decline.

10. Do not get Confused!!! Remember the relationship that exist in each graph!!! BUSINESS CYCLE I think my head is going to explode! Recession

11. The Business Cycle & Unemployment Each recession is unique. Causes of 2008-10 Recession: 1.Lack of oversight by the government 2.Lack of personal finance understanding among consumers 3.Sub prime mortgages 4.Excessive use of CODs as an investment 5.Consumer fear

12. Is the business cycle the only measurement tool? NO! Unemployment Rate Personal Saving Rates Interest Rates Government Actions in the Economy Stock Market LINK: Other Economic Indicators Data

13. Next, some basics on one measurement tool…. the unemployment rate. Global Unemployment Rates: 1.Zimbabwe 95% 2.Haiti 40% 3.Spain 20% 4.Iraq15% 5.USA8.5% Source: CIA World Fact Book March 2011

14. How is Unemployment Measured?

15. Unemployment is measured by the Bureau of Labor Statistics (BLS).  It surveys 60,000 randomly selected households every month.  The survey is called the Current Population Survey. How is Unemployment Measured?

16. Based on the answers to the survey questions, the BLS places each adult into one of three categories: 1)Employed 2)Unemployed 3)Not in the labor force How is Unemployment Measured?

17. Unemployment Rate An Unemployed Worker is:  One who is 16 years or older (but not retired),  not currently employed,  AND is actively seeking employment. According to the Bureau of Labor Statistics: People are Not in the Labor Force if they are:  not actively seeking (wealthy or lazy),  in the military, institutionalized (prison), retired, or in school.  under 16,

18. 090180300 Not in labor force Young and institution- alized Population Working-age population Labor Force Employed labor force Unemployed Labor Force Population (millions) Who is not counted in the labor force? So the UNEMPLOYMENT RATE is a percentage of the LABOR FORCE that DOES NOT have a job. Those that choose NOT to work

19. US Historical Unemployment Rate Source: US Census Available at http: www.data.bls.gov What is going on here? What can you assume has happened over the pass 50 years? Unemployment Rate %

20. WHY? 1.Simply, due to scarcity, there are NOT enough jobs for ALL the people in the USA. 2.Also, some people are just not motivated to work. (they try to find a job only to collect benefits) Economists consider between ___ and ___ unemployment to be a healthy rate. Unemployment Rate 0% unemployment can never be achieved. 4%5% This is a high unemployment rate LINK: Google Unemployment Data

21. Why and How do we stabilize unemployment and the business cycle? (time for some medicine)

22. We need to stabilize this cycle because … 1.The economy cannot take care of itself. (Adam Smith would disagree) 2.A recession ( if it lasts for a long period of time ) can cause High Unemployment and business failure. 3.A Peak can be a bad thing if not controlled. ( It is possible for an economy to do TOO WELL )  Normally prices increase (inflation) during an economic boom, which is not good for people on fixed incomes, such retire folks Why? When we get into macroeconomics we will study why prices tend to increase during an economic boom. Why and How do we stabilize this business cycle?

23. 1.Monetary Policy: The method of controlling the economy through changes in the SUPPLY OF MONEY, INTEREST RATES, and BANK REGULATIONS 2.Fiscal Policy: Another method is the use of TAXATION and GOVERNMENT SPENDING to control the economy. How? Through the use of MONETARY and FISCAL policy

24. INTEREST RATES need to DECREASE during a recession to stimulate the economy by offering cheap rates at which to borrow money. MONEY SUPPLY needs to INCREASE during a recession to stimulate the economy by supplying money to businesses and people. So, our government uses both fiscal and monetary policy to regulate the economy throughout the business cycle. How to Stabilize the Business Cycle using: Monetary Policy An Example of MONETARY POLICY

25. How to Stabilize the Business Cycle using Fiscal Policy An Example of FISCAL POLICY During a TROUGH and RECESSION the government will DECREASE TAXES (more money in) and INCREASE SPENDING (more money in) During a PEAK the government will INCREASE TAXES (more money out) and DECREASE SPENDING (more money out)

26. How to Stabilize the Business Cycle using Fiscal Policy Did not believe in “Laissez Faire” economics (Laissez Faire: NO government regulation of the economy, kind of like CAPITALISM) Instead, Keynes stated that the government should use Spending and Taxation to stabilize the market. (Fiscal Policy) In Latin, Fiscal means a “purse” or used her to mean “state treasury” John Keynes “ is the driving force in an economy and that has a responsibility to fight economic slowdowns (recessions/depressions)”. “AGGREGATE DEMAND (household demand) is the driving force in an economy and that GOVERNMENT has a responsibility to fight economic slowdowns (recessions/depressions)”. His belief was:

27. How to Stabilize the Business Cycle using Fiscal Policy Recession & Korean War World War 2 Great Depression World War 1 Recession Economic Boom Recession 9/11 Recession

28. QUESTION:How are interest rates effected by recession and peaks? QUESTION: How are interest rates effected by recession and peaks? How to Stabilize the Business Cycle using Monetary Policy

29. Positive and Negative Externalities (by-products of economic decisions made by individuals, businesses, and governments)

30. EXTERNALITIES OF A DECISION What are externalities?  a decision that causes costs or benefits to any person OTHER than the person making the decision or buying the good.  In other words, the decision-maker (buyer, producer, or government) does not bear all of the costs or reap all of the benefits from his/her/its actions. These externalities cause either POSITIVE or NEGATIVE results.

31. Negative Externality- byproduct s of consumption/ production that IMPOSE COSTS on 3 rd parties, neither buyers nor sellers. Examples of - externalities include… Examples of - NEGATIVE externalities include…  …the government does not cut taxes or increase spending during a recession. (business failures, high unemployment rates, you lose your job, etc.)  …the Federal Reserve Bank does not lower interest rates when people’s salaries and wages are lowered. (less loans given out by banks, business failures, high unemployment rates, etc.)  …pollution by a firm in the course of production which causes a nuisance or harm to others. (global warming, chicken houses, etc.)

32. EXTERNALITIES OF A DECISION Positive Externality- byproducts of consumption/ production that BENEFIT 3 rd parties, not buyers or sellers. Examples of + POSITIVE externalities include…  …government lowers taxes during a recession. (increases our standard of living, encourages spending, people get to keep their jobs, etc.)  …an individual planting an attractive garden in front of his house may benefit others living in the area. (OTHER EXAMPLES: car pooling, conserving energy, etc.)  …my decision to come to school today and teach. ( I see it as positive, you might see it as negative )

33. Review Questions:  What does the business cycle show?  What are the 5 stages of the business cycle?  At what stage is unemployment the lowest?  At what stage is unemployment the highest?  What economist encourage private ownership AND government regulation of businesses?  What two monetary policy “tools” are used to regulate the economy?  What two fiscal policy “tools” are used to regulate the economy?

34. Study Notes, Vocab & Coach Book! Quiz Friday!