1. Measuring the Economy Goals 9.01 & 9.07

2. Why does the government need to know what the economy is doing?  The government makes decisions that affect the nation’s economy.  The government works to improve the economy and solve economic problems.

3. The Business Cycle  The predictable long-term pattern changes in the national economy  The ups and downs of the economy

4. Phases of the Business Cycle  PHASE 1 – EXPANSION/RECOVERY –General prosperity – economy going up –People buying more goods and services –Businesses producing more goods and services and hiring more employees

5. Phases of the Business Cycle  PHASE 2 – PROSPERITY/PEAK/BOOM –Boom period – economic activity at PEAK –Businesses working and selling at full capacity selling at full capacity

6. Phases of the Business Cycle  PHASE 3 – CONTRACTION –Economy starting to slow down –People buying fewer goods and services –Businesses cutting back production and laying off workers; some forced out of business

7. Phases of the Business Cycle  PHASE 4 – RECESSION –Production at lowest point –High unemployment –Reduced spending on goods and services

8. The Business Cycle Phase 1 EXPANSION Phase 2 PROSPERITY Phase 3 CONTRACTION Phase 4 RECESSION

9. The Business Cycle 1 4 3 2 Trough

11.  Recession –slowdown in economic activity –Real GDP goes down for 6 straight months –Avg. recession lasts about 1 year  Depression –severe economic recession –Real GDP goes down for longer than 1 year longer than 1 year

12. The Great Depression  1929 – 1939  Thousands of businesses forced to close  Millions of people unemployed  Families lost homes & farms  Banks failed; people lost life-savings  Millions of people hungry and homeless

14. The New Deal  Put millions of people to work on government projects such as buildings parks and schools.  Provided low cost loans so people could purchase homes  Started the social security fund.

15. Ways to regulate the business cycle …  Fiscal policy  Monetary policy  Goals of each tool: –to reduce unemployment –to create economic growth –to fight inflation

16. Fiscal Policy  Tries to create and stabilize economic growth through government spending and taxation

17. How should the government regulate fiscal policy during a RECESSION?  Spend more money on highway and public housing construction  Keeps companies in business  Business hires workers to do the job  Workers get paid, Spending goes up  Demand for goods and services go up  Other businesses increase production  Hire more workers … …  Economy expands --- Recession eases

18. How should the government regulate fiscal policy during a RECESSION?  Government cuts taxes  People have more money to spend  Demand goes up  Businesses increase production  Hire more workers, workers get paid  Spending goes up  Production increases … …  Economy comes out of recession

19. Monetary Policy  The way the government regulates the amount of money in circulation

20. Monetary Policy  The government uses the “Fed”, The Federal Reserve System to set monetary policy –Bank for banks, the central bank for the U.S. –Run by a central Board of Governors and 12 regional Federal Reserve Banks located in major cities throughout the nation

21. Monetary Policy  The Fed controls monetary policy by regulating –Interest rates/Discount rates –Reserve requirements –Open market operations

22. Goal during a recession …  Create a loose (easy) money supply –Getting money is relatively easy –More money is available for borrowing and investment –Helps economic growth and employment

23. How should the government regulate monetary policy during a RECESSION?  Discount rate (the interest rate charged on loans to commercial banks)  Lower the discount rate  Banks will borrow more money  Banks will be more willing to loan money to borrowers  Consumers will spend more money  Production will go up  Businesses will hire more workers  Demand will go up

24. How should the government regulate monetary policy during a RECESSION?  Reserve requirements –Percentages of bank deposits that banks must hold on reserve at the central bank –Banks cannot loan this money out  Decrease reserve requirements  Banks will be able to loan out more money  Spending will increase

25. How should the government regulate monetary policy during a RECESSION?  Open market operations –Buying or selling government bonds  Fed buys government bonds  Increases the amount of money that banks are able to lend out  Spending increases  Production goes up  Etc……

26. INFLATION  A general rise in the prices of goods and services  Causes –Economy is expanding –People have more money to spend on goods and services –Demand goes up –Prices rise because people are competing to buy things

27. INFLATION  Effects –People will have to keep paying more for the things they buy –Money buys less (Purchasing power down) –Standard of living declines –Hurts people who live on fixed incomes –Hurts people who spend savings

28. Goals during Inflation …  Create a tight money policy –Decreases the supply of money in circulation –Stops a rising inflation rate by discouraging investors from borrowing

29. Ways to control inflation … FISCAL POLICY  Lower government spending  Raise taxes MONETARY POLICY  Raise discount/interest rates  Increase reserve requirements  Sells government bonds

30. Economic Indicators Statistics used to judge an economy’s health, or where the economy is in the business cycle.

31. Economic Indicators  Gross Domestic Product (GDP)  Per capita GDP  Consumer Price Index (CPI)  Producer Price Index (PPI)  Standard of Living  Stock Market Index  Unemployment Rates