Managers need to know:
Business managers must know causes of recessions and downturns in order to prepare themselves for what will happen in the future. You must also know the signals for recessions so you can know there happening before hand. Lastly I believe managers should know that growth is a norm, recession is the exception.
| Causes of Recessions | How it works | Associated Recessions |
|---|---|---|
| monetary policy | The Fed can slow the economy by tightening monetary policy, which decreases the money supply and/or raises interest rates. Higher interests reduce economic activity by increasing financing costs. | all recessions? The most famous may be the 1980 recession following the Fed under the then chairman Paul Volcker dramatically raised interest rates to fight inflation |
| supply shocks | A sudden increase in an essential commodity can tip the economy into recession. A good example is the oil crisis of the 1970s. | the 1973-75 recession following an oil embargo |
| credit crunches | Banks play a critical role in the economy by funding business operations and production and individuals for their purchases of big-ticket items like houses or cars. When loans become unavailable (credit crunches), the economy can fall into recession. | the Great Recession of 2007-2008 following the burst of the U.S. housing market bubble |
| waves of optimism and pessimism | Listen to the everyday business managers to gauge the level of uncertainty in the economy. When they start sounding gloomy, a recession may be around the corner. | the 2001 recession following the September 11 attack |
| consumer confidence | In some economies, consumer spending plays a critical role. The United States is a good example. A sudden and wide swing in consumer confidence can influence the economy. | the 1990-1991 recession in the buildup of troops prior to the first Persian Gulf War |
| fiscal policy | Increased government spending, such as new highways and aircraft carriers, can stimulate the economy. The government can also use taxes to influence the economy. For example, a tax reduction would leave more money for consumers to spend and vice versa. | the 1970 recession following the end of Vietnam War, |
| foreign business cycles | A recession in an essential trading country can influence the domestic economy. For example, a Canadian recession can negatively affect the economy in the northern border regions of the United States that heavily rely on trade with Canada. | |
| trade wars | Restrictions on foreign trade reduce our exports to the foreign country and thus can be recessionary. The Great Depression is a good example. | the Great Depression following the Smoot-Hawley tariff |
| speculative mania | An asset price bubble and the following crash can contribute to a recession. When asset prices crash, consumers feel less wealthy and decrease spending. | Japan’s depression in the 1990s following a real estate boom, the 2001 recession following the American high-tech stock market bubble, the great tulip craze of Holland in 1636-1637 |
Explain how it affects the economy in your own words.
Monetary Policy is mainly controlled the Federal Reserve and results in control of the US money supply and the short term interest rate. This policy is based around control of hown high high interest rates are and how much money is being put into the money supply. When more money is being put into the money supply this makes the value of the dollar go down, causing prices in many sectors to go up. This can also be seen with interest rates since when interest rates go up it makes it harder for companies and people to take out loans. Usually shortly after people start to spend less money on expensive goods and companies start to rise prices. Since the federal reserve sees the effects of these decisions on inflation in 12-24 months they are manipulating inflation for the future.
What do you need to watch to gauge changes in this?
Monetary policy usually has its biggest affect on the economy during strong business times. So it is important to be especially aware of what the Federal Reserve is doing during these times. Typically during good times of business the Feds start to worry about inflation, causing them to higher interest rates. This is something to look out for since it can cause a downturn. Which can then lead to home building to slowdown cause people can afford the new interest rates. This then leads to value of the dollar going up and making all US goods more expensive. Otherwise said this is how monetary police can cause a recession. Another monetary policy you should gauge is how much money is being put into the money supply by the federal reserve. This is important since the more money made by the federal reserve the less money is worth, otherwise raising the value of the dollar. Which can then eventually lead to a recession.
Q1. Explain how it affects the economy in your own words.
Supply Shocks affects the economy because when one key commodity is suddenly more expensive due to decrease in supply this can cause every business who uses this commodity to have to raise their prices. This can affect the economy greatly since it can determine how much your money is actually worth. If a supply shock is to happen for example with the key commodity oil you. Eventually, you would have to spend more money on gas and many other basic goods. Which would then cause you to have much less money to spend after your bills due too the general inflation that was caused by a supply shock.
Q2. What do you need to watch to gauge changes in this?
To look for changes in Supply Shocks for key commodities you must stay up to date with the news and current events. This will let you known when something bad has happened in an area that supplies a key commodity. From there you must know how that key commodity is used and who it will initially affect. If your looking at an example such as oil, you would be able to say gas companies then shipping companies would be the first ones affected. Once you see these reactions to a supply shock it is important to know that you may be economically vulnerable to a recession,
Q1. Explain how it affects the economy in your own words.
Credit Crunches affect the economy cause when the credit companies/banks have a lack of funds in the credit market, interest rates start to rise. Eventually loans are unavailable, regardless of interest rate which affects the economy greatly. This can cause many problems such as highers borrowing costs and peoples ability to buy goods. This eventually can go from a downturn in the economy too a recession since eventually it can lead to every sector of the economy slowing down.
Q2. What do you need to watch to gauge changes in this?
When guageing to see when a credit crunch will happen it is important to look at the interest rate banks are giving. When bank interest rates are low many people start to take out money. Which can cause the amount of funds companies have in the credit market start to go down. it is important to watch for this since this is the start of a credit crunch. Once the credit companies are low on funds interest rates get increase or loans are unavailable. When forecasting a credit crunch it is important to observe the amount of funds credit companies/ banks have and the the interest rate that way you can spot when interest rates will higher or a recession will occur.
Q1. Explain how it affects the economy in your own words.
Waves of optimism and pessimism affect the economy lowering spending if it is a wave of pessimism it highers spending if it is a wave of optimism. The general idea is that people follow each others actions and this greatly can affects the economy. During times of Pessimism the affect can also lead to a recession. A recession occurs because when peoples are pessimistic they spend less money making demand for products go down. This highers the price because people stop buying as much stuff and makes the value of the dollar go down.
Q2. What do you need to watch to gauge changes in this?
In order to gauge waves of optimism or pessimism you need to first take a look at the general opinion of how the economy is doing currently. When the opinion if good those are times of optimism. This can result in rise in consumer spending. While if the overall opinion of the economy at the time is negative that can result in lowering of consumer spending, this is what you need to watch out for. This starts a recession due to a response of highering prices due to lack of demand. High prices lowers the value of the dollar causing a recession and for business to slowdown even more.
Q1. Explain how it affects the economy in your own words.
Consumer Confidence affects the economy since physiologically we as people are affected by the confidence people generally have on the economy. One example of this would be the gulf war cause at the time this event cause consumer confidence to lower. This resulted in consumer spending to decrease dramatically. A drop in consumer confidence lowers the amount of money being spent. Then demand is then lower causing prices to higher and cause a recession.
Q2. What do you need to watch to gauge changes in this?
In order to watch consumer confidence and determine when it may result in a recession you must look at how well the economy is doing and how people feel at the moment about spending money. When confidence is lost often that can be seen as a sign that the economy is about to drop.
Q1. Explain how it affects the economy in your own words.
Fiscal Policy affects the economy because the more money that is spent by the government officials results in higher taxes. Higher taxes result in less spending money for business’s and consumers resulting in the overall slowing of the economy.
Q2. What do you need to watch to gauge changes in this?
In order to watch out for changes in this watch out for how your government is spending its money. When the government spends a lot of money the taxes are higher which results in less spending money and possibly a recession.
Q1. Explain how it affects the economy in your own words.
Foreign Business Cycles affect the economy since nowadays as we are becoming more and more globalized each country is seen relying on another somewhat for something economically. This means that if there is such a international event that could affect us like for example Russia vs Ukraine. We will be affected because we can now not get Russian oil. this increases the price of oil and made our gas prices higher.
Q2. What do you need to watch to gauge changes in this?
In order to gauge change in foreign Business cycles you must be aware of current events and understand how events in another country can cause problems for your country too. Another thing to look out for is the affect of international events on a countries economics. Many events such as war or disagreements, or even peace treaties can all be seen as triggers to an effect in the economy.
Q1. Explain how it affects the economy in your own words.
Trade Wars affect the economy cause they can cause the US to not be able to get certain goods or highers the price of certain goods. When this happens the economy is now negatively affected because there is a shortage of one of our countries demands.
Q2. What do you need to watch to gauge changes in this?
In order to watch out for changes in trade wars you should review foreign conflicts. Having an understanding of foreign conflict and knowing what our country gets from other countries will let you know whether we are in danger of being affected or not. When we have conflicts with other countries is the main situation to look out for because whatever that country supplies us with we most likely wont be able to get or will be more expensive.
Q1. Explain how it affects the economy in your own words.
Speculative Mania affects the economy cause it is the over inflation of investing in a certain industry. This causes a bubble, when the value of an industry’s assets is more than they can afford caused by investors. eventually this bubble pops cause no investors are willing to pay the over inflated price. This causes a massive drop in value hurting this industry greatly.
Q2. What do you need to watch to gauge changes in this?
In order to watch changes in speculative mania you need to watch for industry’s that for some reason see a temporary over inflation in assets due to investors. These companies being over invested in causes a problem because when the value crashes the business an the economy is hurt greatly.
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
Economic theory that believe if everyone worked hard for themselves you would have the best economy for society.
Theory based on the idea that total spending in the economy has a direct relation to output, employment, and inflation
Economist that believed changes in the money supply is what caused the business cycles.
Government organization that determines moneytary policy in the US.
Policy made by the Federal Reserve based on how much money is being put into the money supply and how high the short-term interest is.
Interest rates charged by the federal reserve for banks to give to their customers.
Difference between Fed policy and inflation, 12-24 months.
Ordinary interest rates accounting for inflation.
Shows the changes in interest rates throughout the years.
decisions policy makers make about government revenue collection and spending decisions.
When one sector of the economy starts to decline causing all the other sectors to decline.
moves up or down before the economy
Describe the characteristics of the following events briefly.
In 1990 Iraqi troops were in Kuwait and the US slowly followed into Saudi Arabia. Recession managers who were cautious initially didn’t get hit as hard. Monetary policy was the main blame for the 1990 recession cause the Feds had just moved the interest rates up prior to the recession.
Fed raised the fed funds rate in early 1999. On September 11, 2001 the US was attacked by a terrorist attack which interrupted everything including the economy. The attacks encouraged the feds to keep cutting the federal funds rate eventually.
Recession that began because of the Arab oil embargo. This increased oil prices and through the US into a recession. The US dollar was devalued and made prices generally higher
An act made by Herbert hoover, made to provide revenue, to regulate commerce with foreign countries, to encourage US companies, to protect american labor. This was due to trade wars.
Prices for some bulbs of tulips began to rise to extraordinarily high levels. But, then collapsed due to speculative manias.