Managers need to know:
How to handle recessions to prepare for ups and downs in the economy at any given time.
| 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.
This policy can affect the economy by the fluctuations of the money supply. When money changes, the interest rate can be affected either in a positive way or a negative way.
What do you need to watch to gauge changes in this?
Watching the interest rates rising before a recession can help prevent the downfall of the economy. Watching out for supply shocks such as increase prices on goods or oil.
Q1. Explain how it affects the economy in your own words.
Supply shocks are a sudden increase in common goods across the economy.
Q2. What do you need to watch to gauge changes in this?
Increase price on oil, interest rates, and increases with key goods in the economy.
Q1. Explain how it affects the economy in your own words.
Affects the economy because banks become limited in the interest that they can pay depositors. This creates an issue where interest rates rise and then large depositors cash in their CDs from banks and purchase treasury bills that have unregulated interest rates.
Q2. What do you need to watch to gauge changes in this?
When loans are unavailable, disregarding the interest rate that a borrower is willing to pay, you can predict an upcoming credit crunch.
Q1. Explain how it affects the economy in your own words.
This affects the economy with boom-bust cycles
Q2. What do you need to watch to gauge changes in this?
Looking over capital spending and business decisions can help prevent a negative impact on the economy.
Q1. Explain how it affects the economy in your own words.
Consumer confidence can create problems for the economy when consumption is at a low. Having too much confidence can make business leaders purchase more goods than they can sell creating an issue.
Q2. What do you need to watch to gauge changes in this?
Keeping data of how much is being spent by consumers can give businesses an idea of how much to buy and how quick it will sell. Looking at past and present information on consumption helps navigate a positive consumer confidence.
Q1. Explain how it affects the economy in your own words.
Changes in government spending and taxes can fluctuate the economy by how much consumers are spending. When these numbers are steady, consumers feel confident in spending, but if interest rates and taxes are high then consumption will decline.
Q2. What do you need to watch to gauge changes in this?
Watching a quarter or two to study the fiscal policy and how it has been affecting the economy can help prepare for price increases. Also to be aware of the automatic stabilizers.
Q1. Explain how it affects the economy in your own words.
Can contribute to domestic recession since the world has imports and exports from countries across the nations. If a certain good is low and cannot be imported to the states then this can have an impact on the economy because of a specific low supply.
Q2. What do you need to watch to gauge changes in this?
Keep track of the overall growth rate over the past few decades and being aware that countries are economically intertwining together as the years past by.
Q1. Explain how it affects the economy in your own words.
Tariffs can have a negative impact on businesses and can reduce the imports coming into the states significantly. This can be a contributing factor to an economy crashing if businesses can not thrive.
Q2. What do you need to watch to gauge changes in this?
Understanding a reduction in imports and exports can help change the future outlook for the economy if this problem is resolved before it goes downhill.
Q1. Explain how it affects the economy in your own words.
Slowing of money-supply can prevent the investment bubbles indefinitely. It can lead to a boom in spending and then a downfall quickly. Seeing prices increase can make people buy products with speculation and then overtime when prices go back down people will reevaluate their standard of living when wealth is at a new low level.
Q2. What do you need to watch to gauge changes in this?
Seeing an increase in consumer spending, a cut back in spending on real estate, and cutbacks in spending of owners of stock.
Explain 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.
Generally view the economy as self-regulating. Self-interest creates the best outcome of economic benefits for a society.
business decisions relating to capital spending do not have a reliable source when trying to prepare for a recession because the future of economic conditions are not well known yet.
Created monetarist economic views that the money supply was the main cause of business cycles.
The central banks of America. Multiple banks help spread out power across the nation.
Major force of business cycles. manages demand by banks controlling money supply.
The interest rate on overnight loans among banks.
A period where consumers slowdown their spending which can be long and variable.
The interest rate less the rate of inflation.
Comparisons of the interest rate on government bonds on different maturity.
Co insides with public spending and taxation along with government income. It can influence the level of demand in the economy.
A period of slow economic growth which usually results with increasing unemployment. capital spending declines along with consumers cutting down on buying goods.
Statistical data predicting a future in the direction of the economy and business cycle.
Describe the characteristics of the following events briefly.
Multiple strains on the economy pushed the economy over the brink. Supply shocks cause prices to increase and consumer consumption to decrease. The recession was related to a poor post-war environment where unemployment was low and the global GDP.
The decline of sales caused inventories to build up and began to destabilize the economy. The inventory downfall had a negative effect in pulling the economy into a recession.
Poor crop harvests had an increase in food prices and caused a subtle supply shock. Business sales were also fluctuating and an explanation to why was not clear. The stock market also began to decline with a swing in stock prices.
This tariff was seen in businesses as a reduction in America’s imports. With this causing retaliation from other countries, the exports would have a negative impact to the economy as well.
Prices increase due to commodity and then tulip bulbs are being purchased on speculation and this leads to a price increase. Buyers raise money to buy the product and the need for cash decreases the boom.