UNIT C ECONOMIC FOUNDATIONS AND FINANCING

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UNIT CECONOMIC FOUNDATIONS AND FINANCING

• 5.01 Exemplify the stages in a business cycle.

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Phases of the business cycle

• Business cycle The movement of an economy
  through recurring phases.

Expansion Recession Depression Trough Recovery
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Expansion

• Prosperous economy
• Low unemployment
• Increase in output of goods and services
• High consumer spending
• A good time for new businesses to start up or
  existing businesses to expand
• Expansion continues until it reaches a peak, at
  which time a recession then begins.

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Recession

• A period of economic slowdown that lasts for at
  least six months
• Reduction in workforce
• Reduced consumer spending
• Fewer goods and services being produced
• Plans for business expansion are put on hold.
• Businesses spend little money on research and
  development.
• Ends when the economy reaches its trough

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Depression

• Period of prolonged recession
• Does not always follow a recession
• Very high unemployment
• Many businesses are forced to shut down.
• Very low consumer spending
• Very little production of goods and services
• Widespread poverty is the result of a depression.

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Trough

• Low point in the business cycle in which the
  economy transitions from recession to recovery
• Economy stops slowing down
• Indicates that a recovery is near

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Recovery

• A period of renewed economic growth following a
  recession or depression
• Economic expansion begins again.
• Business begins to increase.
• Unemployed people begin to find jobs.
• Demand for goods and services increases.

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Factors affecting business cycles

• Responses of businesses to current economic
  conditions
• Consumer outlook and the resulting behaviors
• External factors

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Responses of businesses to current economic
conditions

• Expanding operations during periods of recovery
  or expansion
• Investing in new properties
• Purchasing new equipment
• Increasing inventories
• Hiring additional employees
• Limiting operations during periods of recession
• Laying off workers
• Decreasing inventories to match the decreased
  demand for goods and services

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Consumer outlook and the resulting behaviors

• During a recession, consumers fear the loss of
  jobs and decreases in wages.
• Loss of confidence in the economy
• Reduction in consumer spending
• During a period of economic prosperity and
  recovery, consumers are optimistic.
• Increased consumer spending for material goods
  and luxury items
• Increased production of goods (by businesses) to
  meet consumer demand

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External factors affecting business cycles

• Political changes
• People
• Policies
• Seasonal, climatic, and weather changes
• Holidays
• Major weather events or acts of nature
• International relations
• Wars
• International trade

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Governments influence over business cycles

• Taxes may be raised when the government needs
  additional money to run programs.
• Businesses and consumers have less money to spend
  when they are paying higher taxes.

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Governments influence over business cycles
(cont.)

• In order to boost the economy, the government may
  cut taxes, reduce interest rates, or establish
  federally funded programs.
• The Federal Reserve can lower interest rates in
  order to encourage spending by businesses and
  consumers.

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Governments influence over business cycles
(cont.)

• If inflation becomes a problem, the government
  may increase interest rates in order to
  discourage consumers from buying on credit.
• State and local governments may initiate tax-free
  shopping days in order to increase consumer
  spending, thus giving a boost to the economy.