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 |
Explain how it affects the economy in your own words. It can affect the economy by lowering or highering interest rates which can make a big difference as to whether people can afford to take a bigger loan, so increasing them can make it harder for people and companies to finance something.
What do you need to watch to gauge changes in this? What you need to watch to gauge changes in this is during times of low inflation you need to look at money supply. Also watching interest rate on overnight loans among banks which is the Fed Funds rate. ## Supply Shocks
Q1. Explain how it affects the economy in your own words. A positive supply shock leads to a decrease in prices and negative supply shock leads to an increase in prices as it leads to a higher demand for the commodity needed. Q2. What do you need to watch to gauge changes in this? They should try and understand whether the increase in price is from supply shortage or demand increase. If it’s from a supply shortage it can be a good an indication it’s a supply shock. ## Credit Crunches
Q1. Explain how it affects the economy in your own words. They affect the economy by making new lending come to an complete hault. Which causes a hault of most things as most projects use some sort of loans. Q2. What do you need to watch to gauge changes in this? What you need to watch for is a change in regulation which suddently limit lenders to be able to meet the credit of it’s frequent clients. ## Waves of Optimism and Pessimism
Q1. Explain how it affects the economy in your own words. Times of optimism affects the economy in a positive way as it leads businesses spending more and doing more projects. Meanwhile in times of pessimism they then reduce their spending in large amounts. Q2. What do you need to watch to gauge changes in this? You need to watch for when mid and senior level executives who were once positive about the near future of the economy start sounding negative, then it’’s typically time to take note. ## Consumer Confidence
Q1. Explain how it affects the economy in your own words. Consumer Confidence affects the economy because when the confidence is high people, will spend more, invest more and typically save less. Meanwhile in times of Pessimism people tend to save more, spend less and invest less. Q2. What do you need to watch to gauge changes in this? We need to watch if there is a major noneconomic event that takes place and impacts consumer confidence. ## Fiscal Policy
Q1. Explain how it affects the economy in your own words. It affects the economy in the short term as the government will either increase or decrease it’s spending. Q2. What do you need to watch to gauge changes in this? You need to watch for changes in government spending which affect this. ## Foreign Business Cycle
Q1. Explain how it affects the economy in your own words. It can lead to decline in commerical real estate construction decline and other things which are dependent on high risk investors. Q2. What do you need to watch to gauge changes in this? You need to watch for a recession in other large foreign markets. ## Trade Wars
Q1. Explain how it affects the economy in your own words. It can increase the cost in certain products and reduce sales if you are being affected by the tariff. Q2. What do you need to watch to gauge changes in this? You need to pay attention to the political situation between your country and the country the product is coming from. ## Speculative Mania
Q1. Explain how it affects the economy in your own words. Well people to buy things that are hot, whether it’s stocks, homes, or into the next big trend people will buy on speculation which causes the prices to only go up. Which causes an artifical growth in the economy. When the market is cold, people stay away and start to sell and more and more people will start to sell as prices drops then it turns into spiraling airplane into the ground and consumer spending as a whole will drop. Q2. What do you need to watch to gauge changes in this? Whether they are investing in something based on increased numbers or if they are investing just because people might think it’s going to be the next thing. ## Economic terms
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.
Economy based on free competiton and one which would regulate itself ### Keynseian Economics Needs more government regulation, based on the ideas the future is unknown and having more stable foundation will lead to companies to increase capital spending. ### Milton Friedman Anti Keynseian economics fan and said that monetary policy was the main cause of business cycles. ### The Federal Reserve Banks They control how whether or not to increase interest rates and influence the money supply. ### Moneytary Policy Control the amount of money accessible and the different paths by which new money is supplied. ### Federal Funds Rate The interest rate amongst banks on overnight loans. ### Time Lag The delay in time between an economic action and the consequence following the action. ### Real Interest Rates The interest an investor recieves accounting for inflation ### Yield Curve Shows interest rates by age. ### Fiscal Policy A country’s use of taxes and spending to influence it’s economy. ### Recession When the overall economy has declined for 2 quarters in a row ### Leading Indicators They relate with data that hints of a future economic event. ## Economic events They are changes in the economy. Describe the characteristics of the following events briefly.
Lasted 8 months, mild, and mediocre employement recovery ### the 2001 recession Mild, short, a decrease in manufacturing, investments fell and big layoffs happened. ### the 1973-1975 recession High increase in gas prices, caused by an embargo. Government was spending alot in Nam and wall street crash in 73-74. ### the Smoot-Hawley tariff U.S. increased tariffs on foreign imports by 20%, 25 other countries responded by putting tariffs on the US and foreign trade tumbled. ### the great tulip craze of Holland in 1636-1637 Tulip demand was insanely high in 1636 then instantly collasped in 1637. When asset values don’t align with it’s intrinsic value.