Managers need to know:
| 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 |
-The fed can slow the economy, which decreases money supply. It can also change interest rates. In 1980 they also dramatically raised interest rates to fight inflation.
-you need to watch the money supply, because that is how they decide if they should raise or lower interest rates.
-whenever an out of the blue increase in essential commodity can tip the economy into recession. For example the oil crisis in 1973, which made all of the prices of gas dramatically increase.
-you need to watch your relationship with other countries and your supply if you’re referring to the oil crisis, but if not: watch out for a sudden increase in daily traded items.
-when banks can not make loans available, so consumers can not buy big ticket items, without a loan so then businesses, start to fail because consumers can not become buyers.
- you need to look out for the start of, low interest rates, easy credit, insufficient regulation, and toxic sub-prime mortgages
-when business managers start to sound uncertain about the economy, because they use the economy daily to check on the status of their business. If they sound uncertain a recession may be coming.
-you need to watch your boss’s and how they react too questions relying on the status of there business, and if any major events are going on.
-If for some reason consumer confidence declines, consumers become less certain about their financial prospects, and they begin to spend less money; this in turn affects businesses as they begin to experience a decrease in sales.
-the consumer you need to be able to read their financial situation to know what and how much theyre buying
-By adjusting its level of spending and tax revenue, the government can affect the economy by either increasing or decreasing economic activity in the short term
-specifically by manipulating the levels and allocations of taxes and government expenditures. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals
-it explains the nation’s real GDP fluctuates over time, going through phases as aggregate output increases and decreases
- These changes are caused by levels of employment, productivity, and the total demand for and supply of the nation’s goods and services.
-trade wars can lead to price increase, with manufactured goods, in particular, becoming more expensive, sparking inflation in the local economy overall.
-trade war happens when countries take protectionist actions against each other as a result of barriers to trade.
-Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops, and massive sell-offs cause prices to decline, often quite dramatically.
-you need to watch the timing of everything, as well as a rapid raise in prices, as well as increased media coverage
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.
Refers to the school of thought of economics that originated in the late 18th century and early 19th centuries, especially in Britain.
Denoting the economics theories of the English economist John Keynes.
An american economist and statistician who received the 1976 Nobel Memorial Price in Economic sciences for research on consumption analysis, monetary history and theory and the complexity of stabilization policy.
A regional bank of Federal Reserve System, the central banking system of the U.S.
The policy adopted by the monetary authority of a nation to control either the interest rate payable for very short term borrowing or the money supply, often as an attempt reduce inflation or the interest rate, to ensure price stability and general trust of the value and stability of the nations currency.
The interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis.
A period of time between one event or phenomenon and other.
The rate of interest an investor, saver or lender receives after allowing inflation.
A graph which depicts how the yield on dept instruments- such as bonds, vary as a function of their years remaining to maturity.
The use of government revenue collection and expenditure to influence a country’s economy.
A business cycle contraction when there is a general decline in economic activity.
A piece of economic data that corresponds with a future movement or change in some phenomenon or interest.
Describe the characteristics of the following events briefly.
It was short lived and relatively mild. The unemployment rate increased by 2% points. Following a gradual decline it settled a bit above 4% by the end of the recovery.
A decline in economic activity which mainly occurred in developed countries. It came after a long period of growth and after the dot come boon in early years of the internet and the world wide web.
Was a period of economic stagnation in much of the Western world during this time, putting an end to the overall post world war II economic expansion.
A law that implemented protectionist trade policies in the U.S.
Tulips prices spiked from December 1636- February 1637 with some of the most prized bulbs, like the coveted Switzer, experiencing a 12 fold price jump.