Economics 11909 http:students'resa'netmilewski

1
Economics 11/9/09 http//students.resa.net/milews
ki

• OBJECTIVE Demonstration of Chapter12 and begin
  examination of the business cycle.
• I. Administrative Stuff
• -attendance
• -distribution of test
• II. Chapter12 Test
• III. Journal 33 pt.A
• -Examine the cartoon p.343
• -Answer the caption question p.343
• -Examine Figure 13.2
• -Answer the caption question p.345
• IV. Journal 33 pt.B
• -notes on the business cycle

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This week

• Chapter13 section1
• Chapter14 section1
• Chapter14 section3

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The Business Cycle

• Business cycle - the rise and fall of GDP over
  time.
• GDP Gross Domestic Product
• GDP CIG(X-M)
• C consumer
• I business
• G government
• X exports
• M - imports

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Phases of the Business Cycle

• Ch14 sec1 p.376

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The Recession Phase of the Business Cycle

• There are two phases of the business cycle
• Recession when real GDP declines for two
  quarters in a row (6 months)
• A recession begins following a peak
• Peak the point where GDP stops going up
• A recession ends at a trough
• Trough the turnaround point where GDP stops
  going down.

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The Expansion Phase of the Business Cycle

• Expansion period of recovery from a recession.
  
• Expansion begins at the trough of the business
  cycle.
• Expansion ends when the business cycle reaches a
  new peak.
• Since WWII, the average recession lasted 11
  months. The average expansion lasted 43 months.
• The expansion that began in March 1991 almost
  ended in March 2001 is the longest in history.
  (1st and 3rd quarters of 2001 GDP dropped)

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http//www.willisms.com/archives/stronggdpgrowth.g
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GNP v. GDP

• GDP- the dollar value of all final goods and
  services produced within a countrys national
  borders in a year.
• GNP- the dollar value of all final goods,
  services, and structures produced with labor and
  property supplied by a countries residents.

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Depression

• If a recession becomes very severe, it may turn
  into a depression
• A depression is a state of the economy with large
  numbers of people out of work, acute shortages,
  and excess capacity in manufacturing plants
• Between 1929 and 1933, GDP declined nearly 50
  and unemployment rose almost 800

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Depression

• Currency was in such short supply that towns,
  counties, chambers of commerce, and other civic
  bodies resorted to printing their own money,
  known as depression scrip
• Several factors contributed to the Great
  Depression
• One was the disparity in the distribution of
  income
• Easy and plentiful credit also appears to have
  played a role
• Global economic conditions also played a part as
  American tariffs on imports kept many countries
  from selling goods to the United States

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Economics 11/10/09 http//students.resa.net/milew
ski

• OBJECTIVE Examine of the effects of monetary
  policy on the business cycle types of
  inflation.
• I. Administrative Stuff
• -attendance
• II. Guided Readings
• -Complete the following guided readings
• -Chapter13 section1
• -Chapter14 section1
• -Chapter14 section3
• -Chapter14 Enrichment

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Economics 11/11/09 http//students.resa.net/milew
ski

• OBJECTIVE Examine of the business cycle.
• I. Journal 34 pt.A
• -Questions on Econ U.S.A. episode3
• II. Quiz19
• III. Return of Chapter12 Test
• IV. Journal 34 pt.B
• -notes on the business cycle

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Econ U.S.A. episode 3

• 1.) Why was Congress unable to determine the true
  severity of the Great Depression?
• 2.) What was the result of this problem?
• 3.) How did the U.S. Government prepare
  economically for WWII?
• 4.) How does government spending affect the
  circular flow?
• 5.) How did the environmental concerns of the
  1970s effect the economy?
• 6.) How does the government know if the policies
  they enact have helped the economy?

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This week

• Chapter13 section1
• Chapter14 section1
• Chapter14 section3

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(No Transcript)
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The End of the Depression

• Massive government spending during World War II
  added a huge stimulant to the economy for most of
  the early 1940s
• Recession returned in 1945, but it did not last
• As soon as the war was over, consumers went on a
  buying binge that stimulated expansion again
• Since 1965, there has been a recurring pattern of
  recessions and expansions
• After 1980, however, recessions occurred less
  frequently
• The expansion that began in 1991 is the longest
  expansion in United States history

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Why Business Cycles?

• No one theory seems to explain past business
  cycles, or serves as a way to predict future ones
• Changes in capital expenditures are one cause of
  business cycles
• When the economy is expanding, businesses expect
  future sales to be high, so they invest heavily
  in capital goods
• After a while, businesses may decide they have
  expanded enough and they begin to pull back on
  their capital investments

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Inventory Adjustments Innovation

• Inventory adjustments, or changes in the level of
  business inventories, are a second possible cause
  of business cycles
• Some businesses cut back on inventories at the
  first sign of an economic slowdown and then build
  them back up again at the first sign of an upturn
• When a business innovates, it often gains an edge
  on its competitors because its costs go down or
  its sales go up
• The imitating companies must invest heavily to do
  this, and an investment boom follows

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Monetary Policy

• A fourth possible cause of business cycles is the
  credit and loan policies of the Federal Reserve
  System
• When easy money policies are in effect,
  interest rates are low and loans are easy to get
• Eventually the increased demand for loans causes
  interest rates to rise, which in turn discourages
  new borrowers
• As borrowing and spending slow down, the level of
  economic activity declines

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Economics 11/12/09 http//students.resa.net/milew
ski

• OBJECTIVE Examine of the effects of monetary
  policy on the business cycle types of
  inflation.
• I. Journal 35 pt.A
• -Read Business Week Newsclip p.362
• -Answer questions (1-2) p.362
• II. Journal 35 pt.B
• -notes on the business cycle
• III. Journal 35 pt.C
• -notes on the Commanding Heights (episode2
  day2)

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Shocks

• A final potential cause of business cycles is
  external shocks, such as increases in oil prices,
  wars, and international conflict
• Some shocks drive the economy up, as when Great
  Britain discovered North Sea oil in the 1970s
• Other shocks can be negative, as when high oil
  prices hit the United States in the early 1970s

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Inflation

• Inflation is a special kind of economic
  instability, one that deals with changes in the
  level of prices rather than the level of
  employment and output
• To better understand inflation, we must first
  examine how it is measured
• Then we can examine the causes of inflation and
  its consequences
• In order to find inflation, we start with the
  price level, the relative magnitude of prices at
  one point in time
• To measure the price level, economists select a
  market basket of goods

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CPI

• They then construct a price index such as the
  consumer price index (CPI), the producer price
  index, or the implicit GDP price deflator
• Prices tend to rise faster during expansions and
  then slow down during recessions
• On rare occasions, unusual circumstances may
  cause deflation, or a decrease in the general
  price level

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The Rate of Inflation
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Types of Inflation

• Creeping inflation - inflation in the range of 1
  to 3 percent per year
• Galloping inflation - a more intense form of
  inflation that can go as high as 100 to 300
  percent
• When inflation gets totally out of control,
  hyperinflation - inflation in the range of 500
  percent a year and aboveoccurs

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Causes of Inflation

• Nearly every period of inflation is due to one of
  the following causes
• First explanation demand-pull theory - all
  sectors in the economy try to buy more goods and
  services than the economy can produce
• As C I G converge on stores, shortages occur
  and prices go up

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Causes of Inflation

• Second explanation - federal governments deficit
  - blames inflation only on the federal
  governments deficit spending
• Third explanation claims that rising input
  costsespecially labordrive up the cost of
  products for manufacturers and cause inflation

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Causes of Inflation

• Still another explanation says that no single
  group is to blame for inflation
• According to this view, a self-perpetuating
  spiral of wages and prices begins that is
  difficult to stop
• The final and most popular explanation for
  inflation is excessive monetary growth
• This occurs when the money supply grows faster
  than real GDP
• Inflation cannot be maintained without a growing
  money supply to fuel it

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Consequences of Inflation

• When inflation is present, it can have a
  disruptive effect on an economy for several
  reasons
• The most obvious effect of inflation is that the
  dollar buys less

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Consequence of Inflation

• Decreased purchasing power is especially hard on
  retired people with fixed incomes because their
  money buys a little less each month
• A second destabilizing effect is that inflation
  can cause people to change their spending habits,
  which disrupts the economy
• A third destabilizing effect of inflation is that
  it tempts some people to speculate heavily in an
  attempt to take advantage of a higher price level
• Finally, inflation alters the distribution of
  income
• During long inflationary periods, lenders are
  generally hurt more than borrowers
• Loans made earlier are repaid later in inflated
  dollars

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Economics 11/13/09 http//students.resa.net/milew
ski

• OBJECTIVE Examine Credit Cards.
• I. Administrative Stuff
• -Attendance
• -Final Exam Review
• II. Quiz20
• III. Film Frontline, Credit Cards
• -questions on film about Credit Cards