Managers need to know:
How signals from the outside world will affect the economy and their forecasts.
Multiple strains on the economy. Monetary policy is one of the most common ones, with supply and sudden increase in key goods.
Monetary - Sudden increase in price of key goods, in addition to these two there are other problems that can occur at the same time.
Monetary - 1990-1991
| 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 is the Federal Reserves influence over both the money supply and short-term interest rate.
What do you need to watch to gauge changes in this? Today, it is best to watch short-term interest-rate.
Q1. Explain how it affects the economy in your own words. Supply shock adds difficulties to an already weak economy by increasing prices of key goods or decrease the availability of them.
Q2. What do you need to watch to gauge changes in this? Follow supply demand and the news. But be aware that all of the news are not correct.
Q1. Explain how it affects the economy in your own words. Credit crunches often hinder economic recovery.
Q2. What do you need to watch to gauge changes in this? Availability of money/credit from the bank.
Q1. Explain how it affects the economy in your own words. Waves of optimism increases economic activity, while pessimism decreases it.
Q2. What do you need to watch to gauge changes in this? The thoughts of business managers.
Q1. Explain how it affects the economy in your own words. Consumer confidence has a great impact on spending.
Q2. What do you need to watch to gauge changes in this? World politics and events are some ways to do it.
Q1. Explain how it affects the economy in your own words. Can stimulate the economy by increasing spending.
Q2. What do you need to watch to gauge changes in this? Reductions made by the government, such as tax reductions.
Q1. Explain how it affects the economy in your own words. A foreign business cycle can negatively affect the neighboring countries.
Q2. What do you need to watch to gauge changes in this? The neighboring countries economic.
Q1. Explain how it affects the economy in your own words. Trade wars often have a negative impact on import/export between certain countries.
Q2. What do you need to watch to gauge changes in this? Relations between countries.
Q1. Explain how it affects the economy in your own words. A crash of this can lead to a recession.
Q2. What do you need to watch to gauge changes in this? You need to be aware of other forecasts of the future value.
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 a body who focuses on market theory and economic growth.
Comprise a theory of total spending in the country and its effect on output and inflation.
Was an American economist and statistician.
It is the central bank of American, its job is to provide the nation with a financial system.
A set of actions to control a nation’s overall money supply.
The rate banks charge each other to lend money.
The time period between two events.
It is the actual interest for a loan.
The relationship between interest rate and time.
The use of government spending and tax policies to influence economics.
A period of economic decline.
Economic data that correctly predicts the future.
Events which affects the economic cycle.
Describe the characteristics of the following events briefly.
A mild recession caused by postwar fall outs, the Gulf crisis, savings and loan collapse, and the job cutbacks.
A massive decrease of workers due to a drop in manufacturing industry, with majority of them being permanently laid off. Caused by the increase of the internet and the world wide web.
Was different compared to the previous ones, due to a high unemployment rate and high inflation at the same time. One of the main causes was the high increase of gas and heavy government spending on the Vietnam War.
Signed by President Herbert Hoover signed it to promote American companies and to make them able to compete more with foreign companies.
It was an economic event where Dutch investors bought tulip bulbs to push their price bubble way up.