Measuring the Economy Goals 9.01 & 9.07. Why does the government need to know what the economy...

Measuring the Measuring the EconomyEconomy

Goals 9.01 & 9.07Goals 9.01 & 9.07

Why does the government need to Why does the government need to know what the economy is doing?know what the economy is doing?

The government makes The government makes decisions that affect the decisions that affect the nation’s economy.nation’s economy.

The government works to The government works to improve the economy and improve the economy and solve economic problems.solve economic problems.

The Business CycleThe Business Cycle

The predictable long-term The predictable long-term pattern changes in the pattern changes in the national economynational economy

The ups and downs of the The ups and downs of the economyeconomy

Phases of the Business CyclePhases of the Business CyclePHASE 1 – PHASE 1 –

EXPANSION/RECOVERYEXPANSION/RECOVERY– General prosperity – economy going General prosperity – economy going

upup– People buying more goods and People buying more goods and

servicesservices– Businesses producing more goods Businesses producing more goods

and services and hiring more and services and hiring more employeesemployees

Phases of the Business CyclePhases of the Business Cycle

PHASE 2 – PHASE 2 – PROSPERITY/PEAK/BOOMPROSPERITY/PEAK/BOOM– Boom period – economic Boom period – economic

activity at PEAKactivity at PEAK– Businesses working and Businesses working and

selling at full capacityselling at full capacity

Phases of the Business CyclePhases of the Business Cycle

PHASE 3 – CONTRACTIONPHASE 3 – CONTRACTION– Economy starting to slow downEconomy starting to slow down– People buying fewer goods and servicesPeople buying fewer goods and services– Businesses cutting back production and Businesses cutting back production and

laying off workers; some forced out of laying off workers; some forced out of businessbusiness

Phases of the Business CyclePhases of the Business Cycle

PHASE 4 – RECESSIONPHASE 4 – RECESSION– Production at lowest pointProduction at lowest point– High unemploymentHigh unemployment– Reduced spending on goods and Reduced spending on goods and

servicesservices

The Business CycleThe Business Cycle

Phase 1

EXPANSION

Phase 2

PROSPERITY

Phase 3

CONTRACTION

Phase 4

RECESSION

The Business CycleThe Business Cycle

1

4

3

2

Trough

RecessionRecession– slowdown in economic activity slowdown in economic activity – Real GDP goes down for 6 straight Real GDP goes down for 6 straight

monthsmonths– Avg. recession lasts about 1 yearAvg. recession lasts about 1 year

DepressionDepression– severe economic recessionsevere economic recession– Real GDP goes down for Real GDP goes down for

longer than 1 yearlonger than 1 year

The Great DepressionThe Great Depression

1929 – 19391929 – 1939 Thousands of businesses forced to Thousands of businesses forced to

closeclose Millions of people unemployedMillions of people unemployed Families lost homes & farmsFamilies lost homes & farms Banks failed; people lost life-savingsBanks failed; people lost life-savings Millions of people hungry and Millions of people hungry and

homelesshomeless

The New DealThe New Deal

Put millions of people to work Put millions of people to work on government projects such as on government projects such as buildings parks and schools.buildings parks and schools.

Provided low cost loans so Provided low cost loans so people could purchase homespeople could purchase homes

Started the social security fund.Started the social security fund.

Ways to regulate the business Ways to regulate the business cycle …cycle …

Fiscal policyFiscal policyMonetary policyMonetary policy

Goals of each tool:Goals of each tool:–to reduce unemploymentto reduce unemployment–to create economic growthto create economic growth–to fight inflationto fight inflation

Fiscal PolicyFiscal Policy

Tries to create and Tries to create and stabilize economic stabilize economic growth through growth through government spendinggovernment spending and and taxationtaxation

How should the government How should the government regulate fiscal policy during a regulate fiscal policy during a

RECESSION?RECESSION?

Spend more money on highway and Spend more money on highway and public housing constructionpublic housing construction

Keeps companies in businessKeeps companies in business Business hires workers to do the jobBusiness hires workers to do the job Workers get paid, Spending goes upWorkers get paid, Spending goes up Demand for goods and services go upDemand for goods and services go up Other businesses increase productionOther businesses increase production Hire more workers … …Hire more workers … … Economy expands --- Recession easesEconomy expands --- Recession eases

How should the government How should the government regulate fiscal policy during a regulate fiscal policy during a

RECESSION?RECESSION?

Government cuts taxesGovernment cuts taxes People have more money to spendPeople have more money to spend Demand goes upDemand goes up Businesses increase productionBusinesses increase production Hire more workers, workers get paidHire more workers, workers get paid Spending goes upSpending goes up Production increases … …Production increases … … Economy comes out of recessionEconomy comes out of recession

Monetary PolicyMonetary Policy

The way the The way the government regulates government regulates the amount of money the amount of money in circulationin circulation

Monetary PolicyMonetary Policy

The government uses the “Fed”, The government uses the “Fed”, The Federal Reserve System to The Federal Reserve System to set monetary policyset monetary policy– Bank for banks, the central bank for the Bank for banks, the central bank for the

U.S.U.S.– Run by a central Board of Governors Run by a central Board of Governors

and 12 regional Federal Reserve Banks and 12 regional Federal Reserve Banks located in major cities throughout the located in major cities throughout the nationnation

Monetary PolicyMonetary Policy

The Fed controls The Fed controls monetary policy by monetary policy by regulatingregulating –Interest rates/Discount Interest rates/Discount ratesrates

–Reserve requirementsReserve requirements–Open market operationsOpen market operations

Goal during a recession …Goal during a recession …

Create a loose (easy) Create a loose (easy) money supplymoney supply– Getting money is relatively easyGetting money is relatively easy– More money is available for More money is available for

borrowing and investmentborrowing and investment– Helps economic growth and Helps economic growth and

employmentemployment

How should the government How should the government regulate monetary policy during aregulate monetary policy during a

RECESSION?RECESSION? Discount rate (the interest rate charged on Discount rate (the interest rate charged on

loans to commercial banks)loans to commercial banks) Lower the discount rateLower the discount rate Banks will borrow more moneyBanks will borrow more money Banks will be more willing to loan money to Banks will be more willing to loan money to

borrowersborrowers Consumers will spend more moneyConsumers will spend more money Production will go upProduction will go up Businesses will hire more workersBusinesses will hire more workers Demand will go upDemand will go up

How should the government How should the government regulate monetary policy during aregulate monetary policy during a

RECESSION?RECESSION? Reserve requirementsReserve requirements

– Percentages of bank deposits that banks Percentages of bank deposits that banks must hold on reserve at the central bankmust hold on reserve at the central bank

– Banks cannot loan this money outBanks cannot loan this money out Decrease reserve requirementsDecrease reserve requirements Banks will be able to loan out more Banks will be able to loan out more

moneymoney Spending will increaseSpending will increase

How should the government How should the government regulate monetary policy during aregulate monetary policy during a

RECESSION?RECESSION? Open market operationsOpen market operations

– Buying or selling government bondsBuying or selling government bonds Fed buys government bondsFed buys government bonds Increases the amount of money that Increases the amount of money that

banks are able to lend outbanks are able to lend out Spending increasesSpending increases Production goes up Production goes up Etc……Etc……

INFLATIONINFLATION A general rise in the prices of goods and A general rise in the prices of goods and

servicesservices

CausesCauses– Economy is expandingEconomy is expanding– People have more money to spend on goods People have more money to spend on goods

and services and services – Demand goes upDemand goes up– Prices rise because people are competing to Prices rise because people are competing to

buy thingsbuy things

INFLATIONINFLATIONEffectsEffects

– People will have to keep paying more People will have to keep paying more for the things they buyfor the things they buy

– Money buys less (Purchasing power Money buys less (Purchasing power down)down)

– Standard of living declinesStandard of living declines– Hurts people who live on fixed incomesHurts people who live on fixed incomes– Hurts people who spend savingsHurts people who spend savings

Goals during Inflation …Goals during Inflation …

Create a Create a tight money tight money policypolicy– Decreases the supply of money in Decreases the supply of money in

circulationcirculation– Stops a rising inflation rate by Stops a rising inflation rate by

discouraging investors from discouraging investors from borrowingborrowing

Ways to control inflation …Ways to control inflation …FISCAL POLICYFISCAL POLICY

Lower government spendingLower government spending

Raise taxesRaise taxes

MONETARY POLICYMONETARY POLICY

Raise discount/interest ratesRaise discount/interest rates

Increase reserve requirementsIncrease reserve requirements

Sells government bondsSells government bonds

Economic IndicatorsEconomic Indicators

Statistics used to judge Statistics used to judge an economy’s health, or an economy’s health, or where the economy is in where the economy is in

the business cycle.the business cycle.

Economic IndicatorsEconomic IndicatorsGross Domestic Product (GDP)Gross Domestic Product (GDP)Per capita GDPPer capita GDPConsumer Price Index (CPI)Consumer Price Index (CPI)Producer Price Index (PPI)Producer Price Index (PPI)Standard of LivingStandard of LivingStock Market IndexStock Market IndexUnemployment RatesUnemployment Rates