Business Cycle

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Business Cycle
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Economic Phases

• Prosperity Boom
• Economy is improving Economic activity peaks
• Business activity is increasing Businesses work
  at full capacity
• Businesses hire more workers Stores sell at
  record amounts
• Consumers buy more Peak High point of boom
• Decline Recession
• Economy slows down Lowest period for
  production
• Production is cut down High unemployment
• Workers are laid off Low consumer
  spending Trough Low point of recession
• Depression Severe recession

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Great Depression

• The depression begins in 1929.
• By 1933, salaries decreased by 40 and hourly
  wages by 60 compared to 1929 levels.
• The average family income fell from 2,300 to
  1,600.
• 1930 4 million Americans were unemployed. By
  1933 the number tripled.
• Many Americans marked this as the end of
  capitalism. Communists and Socialists fought
  with each other leading to the decline of this
  movement.

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Men looking for jobs at an unemployment office.
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New Deal

• FDRs plan to end the depression. First had to
  restore faith in banks.
• Began fireside chats insuring Americans the
  situation would improve.
• Hundred Days March 9-June 16, 1933. Congress
  passed 15 bills. Most were written by FDR.

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Financial Reform

• Glass-Steagall Act (1933) Banks could not
  invest in the stock market. Created the FDIC to
  insure deposits.
• Federal Securities Act (1933) No stock market
  fraud.
• The nations economy would now be split into
  fiscal and monetary policy.

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Fiscal Policy

• The way the government taxes and spends money.
• In a recession
• The government spends more money on public works
  projects in order to provide jobs. This keeps
  companies running and workers employed.
• Provides money to people and increases demand.
  Producers will then increase supply.
• Tax cuts Gives people more money to spend.
• The government will control peaks by increasing
  taxes.

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Monetary Policy

• The way the government regulates the amount of
  money in circulation. Accomplished through
  raising or decreasing interest rates. The
  Federal Reserve (FED) is in control of monetary
  policy.
• There are 12 district banks to the Federal
  Reserve.

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Loose and Tight Money

• Loose Money
• Easy to borrow
• Consumers buy more
• Business Expansion
• Employment increases
• Spending increases
• This can lead to inflation

• Tight Money
• Difficult to borrow
• Consumers buy less
• No business expansion
• Unemployment increases
• Production decreases
• This can lead to a recession

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Fractional Reserve Banking

• The way banks create money.
• Discount Rate Prime rate that banks can borrow
  money from the FED.
• Reserve Requirements Percentage of deposits
  that banks must hold.
• Banks are free to loan out money that is not on
  reserve leading to expansion.

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Inflation

• A decline in the value on money.
• Purchasing power Amount a dollar can buy.
• Inflation is measured by the Consumer Price Index
  and the Implicit GDP price deflator.

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Consumer Price Index

• Change in price over time of a specific group of
  goods and services the average household uses.
• Each year is compared to the average of
  1982-1984. This makes the base year.
• This tells us the change in the standard of
  living.

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Implicit GDP Price Deflator

• Takes inflation away for year comparisons.
• The base year used for comparisons is 1987.

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Gross Domestic Product

• The total dollar value of all final goods and
  services produced and sold in the nation during a
  single year.
• Value is always expressed in terms of the dollar.
• Final means only finished goods.
• Only new items are counted. Anything bought used
  is not counted.

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GDP Categories

• Consumer Goods Goods or services bought by
  consumers for direct use.
• Business Goods Business purchase of tools,
  machines, and buildings used to produce other
  goods.
• Government Goods Anything bought by federal,
  state, and local governments.
• Export Anything sold to other countries.
• Import Anything bought from other countries.
• Net Exports The difference in what the nation
  buys and sells with other countries.

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Unemployment

• Unemployment rate Percentage of the labor force
  without jobs but actively looking for work.
• Unemployment reduces living standards, disrupts
  families, and causes a loss of self-respect.
• Reaches its height during recession.

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Types of unemployment

• Cyclical Associated with the ups and downs of
  the economy.
• Structural Changes in the economy based on
  technology.
• Seasonal Based on weather.
• Frictional Based on people being terminated or
  looking for new jobs.