1. Chapter 6 The Health of the Economy

2. 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.

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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.

13. 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

14. 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

15. 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

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

17. 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

18. 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.

19. 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

20. 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

21. 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

22. 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

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

24. 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

25. 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

26. 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

27. 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.

28. 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