28
1 Chapter 6 The Health of the Economy

1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

Embed Size (px)

Citation preview

Page 1: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

1

Chapter 6 The Health of the Economy

Page 2: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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.

2

Page 3: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

3

Business Cycle – the ups and downs of the economy

Trough

ExpansionContraction

Peak

Page 4: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

4

Types of Business CyclesContraction – 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 offExpansion - 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

Page 5: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

5

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

Page 6: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

6

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

Page 7: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 8: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 9: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

9

Factors Affecting Ups and Downs•Consumer Confidence

Psychological factor – based on the feelings of the consumer

•Technological InnovationSpurred 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

Page 10: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 11: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 12: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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.

12

Page 13: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 14: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

14

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

Page 15: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 16: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

16

Government Also Needs to Borrow Money

Selling various types of securities: •Saving Bonds •Treasury Bills

Page 17: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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 

Page 18: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

Section 6.3Stabilizing 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.

18

Page 19: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

19

Two Types of Policies1. 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

Section 6.3Stabilizing the Economy

Page 20: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 21: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 22: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 23: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

23

Fed can manipulate the money supply in three ways:

1. Engage in open market operations2. Raise and lower the discount rate3. Adjust the reserve requirement

Page 24: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 25: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

25

•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

Page 26: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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

Page 27: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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.

Page 28: 1 Chapter 6 The Health of the Economy. Section 6.1 Economic Ups and Downs Objectives Describe the phases of the business cycle; Analyze the effects of

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