Managers need to know:
Managers need to know what causes recessions and Downturns in order to properly prepare themselves for the future. They must also know the signals for recessions In order to help provide evidence for the Potential recession.
| 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 is meant to control the country’s money supply, and promote economic growth. This is the most common cause of her recessions
What do you need to watch to gauge changes in this?
What you need to watch in order to gauge Changes in this is the federal funds rate, or the interest rate on overnight loans among banks.
Q1. Explain how it affects the economy in your own words.
These are unexpected events they can rapidly change the supply and demand of many different resources. Supply shocks usually result in unpredicted changes in price. This is also the second most common cause of a recession
Q2. What do you need to watch to gauge changes in this?
What business managers should watch, is the difference between supply and demand. If there are rapid price changes due to supply, then this usually means that there is a supply shock.
Credit Crunches
Q1. Explain how it affects the economy in your own words.
This affects the economy because when credit companies/banks Lack funds in the credit market, interest rates start to rise. This causes a chain of events which can affect the economy greatly. And will create a shortage of funds
Q2. What do you need to watch to gauge changes in this?
Business managers need to watch different banks and credit companies when it comes to the credit market. If there are changes that limit the lenders ability to meet the credit needs of their customers, that is when credit crunches occur.
Q1. Explain how it affects the economy in your own words.
This happens when companies and business managers tend to follow the current trend at the time. Because companies don’t like to Risk going outside the box they will tend to follow each others moves when it comes to the market. This will cause many different fluctuations in the economy.
Q2. What do you need to watch to gauge changes in this?
In order to gauge changes in this, businesses must pay attention to other What other Businesses are doing when it comes to the market.
Q1. Explain how it affects the economy in your own words.
This indicator measures the degree optimism and confidence at the consumers have regarding the overall economy and their own financial situation.
Q2. What do you need to watch to gauge changes in this?
In order to gauge changes in consumer confidence you must watch the Economy in order to determine if companies are making confident decisions when it comes to spending money.
Q1. Explain how it affects the economy in your own words.
Fiscal policy is when the government spends money which result in higher taxes, which also results in less spending money for businesses and consumers. This will result in the overall slowing of the economy.
Q2. What do you need to watch to gauge changes in this?
In order to watch the changes and physical policy you must watch how your government is spending money. When the government is spending a lot of money, the taxes will raise which results in companies spending less money.
Q1. Explain how it affects the economy in your own words.
Foreign business cycle is when a foreign country can have an affect on our country’s economy. Because of international trade and many other different aspects, if a foreign country is having difficulty with their economy, it may also affect our economy.
Q2. What do you need to watch to gauge changes in this?
In order to gauge changes in this, you must watch what is going on in different countries when it comes to their economy, and what might affect us.
Q1. Explain how it affects the economy in your own words.
Trade wars are when two different countries are at odds with each other when it comes to importing and exporting goods. Some might place tariffs or other types of restrictions while others might restrict trade altogether.
Q2. What do you need to watch to gauge changes in this?
In order to watch out for trade wars you must view the relations between different countries, and if your country might be putting tariffs on imported goods.
Q1. Explain how it affects the economy in your own words.
This happens because of over inflation in certain industries. When people invest in a company the value of the industry will increase, and this will happen more and more often until the price will rise to an unreasonable amount that no one is willing to pay. This will cause that stock to crash which will hurt the industry greatly.
Q2. What do you need to watch to gauge changes in this?
Business managers must watch a companies inflation in the market. If the market is getting too high then there will potentially be a crash.
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.
A economic theory that believes if everyone worked hard for themselves you would have the best economy for society.
A theory based on the idea that total spending in the economy has direct relationship to output, employment, and inflation.
This is a economist that believed changes in the money supply is what causes The business cycle.
A government organization that determines most of the money policies in the United States
A policy made by the federal reserve bank based on how much money is being put into the money supply and how high short term interest should be
The interest rate charged by the federal reserve bank
The difference between federal policy and inflation
Regular interest rates which count for inflation
Shows the changes in interest rates over the past few years
A policy that is made about government revenue collection and spending decisions
When the economy starts to decline rapidly
Indicators they can show whether or not the economy will have a recession or the economy will have a boost.
Describe the characteristics of the following events briefly.
Monetary policy was the main blame for this recession. Because of the high interest rates in multiple other factors prior to this recession. Many individuals who predict this recession were fairly unharmed, while others had a major impact.
This recession was caused by The federal national bank raising the federal fund rate, and the September 11 attacks which caused a major impact to the economy.
This recession was caused by the Arab oil embargo. The increase in oil prices in the trade wars caused a massive hit to the economy which put it into a recession.
This was a policy that was provided to regulate the importing and exporting with foreign countries to provide revenue and encourage US companies to produce American goods.
This is one of the first ever major market bubble crashes of all time. This is due to high levels of inflation which crashed the market.