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 affects the economy based on the fact that the government can somewhat control the overall money supply, and to promote economic growth and encourage employment nationally. What do you need to watch to gauge changes in this? The federal government worries about the inflation during these times, because when business isn’t booming, less money will be spent among consumers because they have less money, based on inflation, the costs go up too. ## Supply Shocks
Q1. Explain how it affects the economy in your own words. When the government has smaller levbels of access towards certain materials, in the case of oil, gasoline, and some precious metals. This makes it harder to sell more, which in turn leads to higher prices because the supply is low. Q2. What do you need to watch to gauge changes in this? You must hear about this supply that is harder to gain access to, and in turn the government sends more resources to cover the cost of said material. ## Credit Crunches
Q1. Explain how it affects the economy in your own words. No matter how much somebody is willing to spend, loans are unavailable to be used through the times of credit crunch. Q2. What do you need to watch to gauge changes in this? Dramatic change in environment or the economy will force banks to stop handing out loans, even if the payee is willing to produce more on the table to prove a loans worth. ## Waves of Optimism and Pessimism
Q1. Explain how it affects the economy in your own words. Business owners make decisions based on their psychology, so if an optomistic owner decides to expand, in trying times, while wishing the best, they could win or they could lose. Q2. What do you need to watch to gauge changes in this? Risk and uncertainty in expansion or to contunie on the journey of owning a business is all effective on the economy, or your own personal beliefs. ## Consumer Confidence
Q1. Explain how it affects the economy in your own words. People buy more when the economy is doing well, and when they have bills in their pockets, vs not having money and not spending due to inflation or unemployment. Q2. What do you need to watch to gauge changes in this? Is recession in place? Is the inflation high? Do people have enough to spend, and is the product worth spending for? ## Fiscal Policy
Q1. Explain how it affects the economy in your own words. Fluctions in the size of the government and their spending affect the economy, depending on their spending, and their giving to businesses and consumers. Q2. What do you need to watch to gauge changes in this? Watching the economy boom, based on war efforts and spending can be a large factor, but also the size of their spending and limitations can affect this aswell. ## Foreign Business Cycle
Q1. Explain how it affects the economy in your own words. Trade flow and the willingness while also having something to trade can affect the econoy for all countries involved in this massive trade market globally. Q2. What do you need to watch to gauge changes in this? A look in on limitations and willingness to trade via certain countries or if there is inflation , does the country have enough to spend if it isn’t a product for profot sale, vs a product for product sale. ## Trade Wars
Q1. Explain how it affects the economy in your own words. Depdning on tariffs and restrictions, then countries won’t trade or won’t allow trades inside of the country, depending on amount they have, or not finding ways to compromise. Q2. What do you need to watch to gauge changes in this? Tariffs and resdtriction on certain products is the easist way to see this within your home country. ## Speculative Mania
Q1. Explain how it affects the economy in your own words. Investment booms can occur, like the housing market, but when the demand is low, and the supply is high, we see downfalls and market crashes or recessions. Q2. What do you need to watch to gauge changes in this? You must watch the big markets, that could affect the supply and demand levels of certain things, like houses, technology, and even everyday goods. ## 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.
Economic growth based on ideas from the 18th-19th centuries, also has economic freedom and free competition. ### Keynseian Economics Prices are fluctiating, and that depending on supply or demand spikes, the spending will also be affected. Trading has alot of to do with these ideas and points, spending goes high, the demand was high at that instant. ### Milton Friedman Explained inflation fluctions, and also that a business is responsible for maximizing revenue for the shareholders. ### The Federal Reserve Banks 12 federal banks that oversee the safety of a nations financial systems and the portection of consumer rights and possessions. ### Moneytary Policy Control overall money/ interest gained to achieve economic gain and overall growth. ### Federal Funds Rate Interest rate payed by institutions based on unsecured loans, to protect the money borrowed from the government. ### Time Lag The time between an economic action and its consequence, such as selling, and then having to buy more again, or a loss on products. ### Real Interest Rates Rate of interest an investor recieves after the allowance of inflation. ### Yield Curve Fixed interest against the length of time they have to mature, plotted on a graph. ### Fiscal Policy Use of governement spending and taxation to positively affect and influence the economy, promote strong and sustainable growth, while reducing poverty and recession. ### Recession Decline in economics based on trade and spending throuhgout the governement and globally. ### Leading Indicators Any measurable or observable variable that shows or predicts a trend in interest within the economy. ## Economic events
Describe the characteristics of the following events briefly.
Oil price shock and recession occurred as a new president was voted in the US, the prime minister of Canada resigned, and war spending was low, which also played an affect on spending globally, mostly for the Western world. ### the 2001 recession The internet and tech world was at a boom, which caused manufacturing to decline, across developed countries, compnaies also stopped investing and jobs were lost at this time. ### the 1973-1975 recession Cold war spending was low, and raising oil prices based on exports and now the spending was too high on the Vietnam war. ### the Smoot-Hawley tariff Reduce imports dramatically, businesses saw this and our exports decline based on restriction of importation. ### the great tulip craze of Holland in 1636-1637 The flower craze in Holland spiked 12 fold and people were buying these nice tulips until they could not find anymore buyers, so the market for their flowers went into major decline.