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.
Monetary Policy are actions taken by a countries monetary authorities to control and create economic growth. Actions include raising or lowering interest rates to stabilize inflation. Monetary policies are able to effect employment rates as well as GDP rates.
What do you need to watch to gauge changes in this?
Gauging monetary policy changes can be quite simple. Low unemployment and rising inflation will cause the Fed policy to go at or above neutral. Rate hikes are common when inflation is considered high. Changes in monetary policy usually come when the unemployment numbers along with the inflation numbers change.
Q1. Explain how it affects the economy in your own words.
Supply and demand are basic fundamentals of the economy. When a supply shock occurs, usually prices will drastically increase or decrease the price of said product. These can be seen as both negative and positive. some can lead to a boom where prices drop and the standard of living benefits. Negatively, supply shocks can also cause economic stagnation, price raises, and weak supply lines.
Q2. What do you need to watch to gauge changes in this?
Current political events or global crisis tend to be beacons that can are used to predict supply shocks. Wars in countries with oil supply can create a shock to supply and demand. Natural disasters such as hurricanes can create shocks to the economy as well.
Q1. Explain how it affects the economy in your own words.
Credit crunches can prevent banks/lenders from doing business as they would commonly do before a dramatic change in the banking environment.
Q2. What do you need to watch to gauge changes in this?
Monitoring trends in how banks lend money can serve as a way to predict credit crunches. Long periods of carelessness on the lending front will lead to defaulting loans and racking up poor debts.
Q1. Explain how it affects the economy in your own words.
These two terms can create economic trends. Having an optimistic view of the economy can lead to consumer spending, better trends of supply and demand, higher job rates, and a growing investment market. Having a pessimistic view can sour the economy, and sometimes this viewpoint can lead economies into recessions.
Q2. What do you need to watch to gauge changes in this?
Current events, political outlooks, GDP numbers can all serve as tools to use to better gauge optimism and pessimism.
Q1. Explain how it affects the economy in your own words.
Consumer Confidence is the way we as individuals gauge our confidence in the economy. Mentally is people are not confident in the direction of the economy,consumer spending will go down. Limited spending can cause low demand and higher rates of supplies.
Q2. What do you need to watch to gauge changes in this?
Understanding the state of economic affairs is important when looking at consumer confidence. Usually when the economy is strong so is confidence. Political events and election can also play a role in consumer confidence depending on which party is in power.
Q1. Explain how it affects the economy in your own words.
Government spending plays huge roles in how individuals are taxes. If there is higher spending, there will be higher taxes and less spending by both businesses and consumers slowing the overall rate and growth of the economy.
Q2. What do you need to watch to gauge changes in this?
Money has to come from somewhere when the government spends money. Understanding political events and who’s in power can help gauge how the federal government will spend their money.
Q1. Explain how it affects the economy in your own words.
Foreign Business cycles are how economies fluctuate in activity across the world. In a world where each country has something to offer as an export, these cycles can dictate supply and demand chains internationally.
Q2. What do you need to watch to gauge changes in this?
Political events such as regional wars and natural disasters are great places to start when trying to predict changes.
Q1. Explain how it affects the economy in your own words.
Trade wars have implications domestically and internationally. Supply chains can become issues as well as increase in pricing. When there is high demand and low supply, the economy tends to slow in those areas.
Q2. What do you need to watch to gauge changes in this?
This has everything to do with current affairs and political events. These events can cause nations to tighten their stances on certain countries with tarriffs and bans which create trade wars.
Q1. Explain how it affects the economy in your own words.
Over inflating a market has major repercussions. Some industries such as energy and food don’t have as much repercussions because they are everyday needs, but industries where it is more a want than a need can cause major problems when people are no longer willing to pay the inflated price. These speculations can destroy industries and put individuals and consumers out of work.
Q2. What do you need to watch to gauge changes in this?
Paying attention to the investment markets and what industries are becoming over inflated is a good start. FinViz.com is a site that can give you quality insight on the 11 major industries in the investment market, keeping you up to date on market data and trends.
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.
The idea that free trade and competition for workers and businesses created a more healthy laid back strategy to economics. A more long-term focused theory
A theory that puts short term economic growth into perspective. The belief is the government should get involved during economic downturns with the understanding that the economy will grow and shrink over time.
Economist that believed that changes in monetary supplies caused the business cycle.
The central banking system of the United States that operate in public interest. There are 12 district banks across the United States.
Set of actions focused on controlling a countries money supply and create eventual economic growth.
Interest that banks charge one another to borrow money overnight.
A delay between economic actions and their eventual consequences.
The rate of interest an investor receives after inflation.
A way to measure bond investors feelings on risk. This can have a huge relation to the returns one can receive on their investments.
The use of government spending and tax policies to determine a countries economic outlook. Fiscal policy is used to promote long-term growth.
The decline of GDP for two consecutive quarters where economic activity declines significantly.
Data that can help predict future events/trends in economic markets.
Describe the characteristics of the following events briefly.
External events such as the Persian Gulf Crisis helped cause the 1990 oil price shock along with high inflation and caused little to no business/consumer confidence sending the United States into an 8-month long recession.
A major decline in business investment on the IT line of work resulted in 1.2 million lost jobs along with almost 1 million lost automotive manufacturing jobs caused less demand. After the 9/11 terrorist attacks, the Fed reduced the federal funds rate four times to 3% the country saw this as a consumer confidence booster and by January 2002 the rates reached as low as 1.75% .
The raise of oil prices caused soaring gas prices as well as a ban on oil exports to the US along with Vietnam War spending caused the 2-year long recession. To make things worse, Wall Street crashed in 73-74 causing this recession to stretch through both the Nixon and Ford presidencies.
This tariff sought to increase revenue, regulate commercial goods with foreign nations, and protect American jobs. The tariff resulted in tariffs on over 20,000 imported goods.
Tulips were a hot commodity in Holland causing prices to become inflated. When traders couldn’t find new buyers to pay these prices, demand collapsed creating the market bubble to blow.