Managers need to know:
Managers need to know the causes for recessions and downturns so they can be on top of their businesses future. Understanding the causes for these allows the manager to avoid a blind side hit to the economy and their market. If you can see a recession coming you can prepare yourself, your teams, and your business for what is coming to withstand the innevetable.
| 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.
The goal of monetary policy is to control the performance of the economy seen through factors like inflation, economic output, and employment. Monetary policy effects the economy through an increase or decrease in interest rates. When interest rates rise it tightens up the economy. It is harder to borrow funds and creates inflation. On the other hand when interest rates decrease its easier to borrow money and economic activity picks up. This eases the economy and everyone is happy.
What do you need to watch to gauge changes in this?
At times of low inflation looking at money supply is the only way to gauge monetary policy during times of deflation.
Q1. Explain how it affects the economy in your own words.
Supply shocks can affect the economy in a positive or a negative sense. Supply shocks are created by unexpected events in the world that affects output or disrupts supply chains. A positive supply shock increases output and causes prices to decrease. A negative supply shock decreases output and causes prices to increase.
Q2. What do you need to watch to gauge changes in this?
To gauge changed in supply shocks you must be up to date with what is happening in the world. Keeping up to date will let you know when something happens in a key commodity. Finding out what key commodity will be affected allows you to understand what markets will be affected and what the ripple like affects will come in the future. Being able to gauge changes in supply shocks is important since they are the secondary cause of recession.
Q1. Explain how it affects the economy in your own words.
Credit crunches result in no economic growth because a decrease in capital liquidy and a decrease in companies and peoples ability to borrow money. When a credit crunch occurs credit companies lack funds resulting in an increase on interest rates. This creates unavailability of loans and hurts the economy greatly since peoples ability to spend money decreases.
Q2. What do you need to watch to gauge changes in this?
To see changes in this you want to guage the interest rates that banks are giving. As the interest rates increase the possibility of a credit crunch increases. You want to look at the funds that these credit companies have and as people pull their money out and that number gets lower a credit crunch is nearing.
Q1. Explain how it affects the economy in your own words.
If there is a wave of optimism there is higher spending and if it is a wave of pessimism there is lower spending in the economy. This is basically the trend that people in the economy follow. If people don’t spend a lot and there is a wave of pessimism then product demand goes down and the other way around for optimism.
Q2. What do you need to watch to gauge changes in this?
The best way to guage this is to just watch how the economy is doing. If the economy is doing well then the trend is to waves of optimism and if the economy is hurting then there are waves pessimism.
Q1. Explain how it affects the economy in your own words.
Consumer confidence affects the economy because people are what make the economy the economy and what they think and feel affects what they do which in turn affects the economy. Psychology affects the decisions consumers make and a drop in confidence results in less spending while a boost in confidence results in more spending which results the economy in a negative or a positive way depending.
Q2. What do you need to watch to gauge changes in this?
You can gauge this through the spending habits of the people and the confidence or lack of confidence they have in the economy.
Q1. Explain how it affects the economy in your own words.
How the government adjusts their spending and revenue it affects the overall economy. By adjusting their spending and tax revenue the government either increases or decreases economic activity.
Q2. What do you need to watch to gauge changes in this?
The way to gauge this is by watching the government spending and as they spend more money the taxes go up which is really what you want to watch for because it could lead to a poor economy.
Q1. Explain how it affects the economy in your own words. Foreign business cycles affect the economy because in todays world everyone is connected. With this being true what happens world wide affects the economy. An obvious example of this is what has happened in Ukraine with Russia. This has lead to an inflation on oil prices due to the U.S not being able to get oil from Russian soil.
Q2. What do you need to watch to gauge changes in this?
To gauge this you must keep up to date with world news. What happens around the world can significantly affect the U.S. economy.
Q1. Explain how it affects the economy in your own words.
Trade wars affect the economy because it results in the U.S. not being able to get a certain product or raises the price of that product. Depending on the severity of need the product is could lead to a spiral in the economy.
Q2. What do you need to watch to gauge changes in this?
To gauge this you need to understand what countries we are friends with and what countries we get certain products from.Keeping up to date with news will help you to know what is happening world wide.
Q1. Explain how it affects the economy in your own words.
Speculative mania fuels the inflated prices resulting in the bubble to eventually pop. This leads to prices declining and the economy hurting.
Q2. What do you need to watch to gauge changes in this?
Gauging speculative mania you must watch for inflation in a market. Companies seeing inflation and being over invested in causes the innevitable bubble popping.
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 theory focused on economic growth through economic freedom that would result in a positive economy.
A theory that believes fluctuation in any spending causes a changing output.
An american economist thats theory states, “an entitys greatest responsibility lies in satisfaction of the shareholders”.
The governments organization that runs the moneytary policy.
The set of actions to control a nations overall money supply and achieve economic growth.
The interest rate charged to lending institutions on unsecured loans that are borrowed over night.
The time between an economic action and the consequence.
The interest rate adjusted for inflation.
The change in interest rates throughout a time period.
The use of government spending and taxation to influence the economy.
A period of severe economic decline.
Data that helps forecast the economy.
Describe the characteristics of the following events briefly.
The 1990 -91 recession was caused by several factors including the Persian Gulf crisis, The savings and loan collapse, and job cutbacks from lower defense spending. This lasted for 8 months and was a mild recession compared to previous.
In 2001 the U.S. suffered the terrorist attack of 9/11 which stopped everything at the time including the economy. This and other factors led to a breif recession.
This recession began because of an oil crisis. The increase of oil prices put the U.S. into a recession.
Herbert Hoover made this act in 1930. The act raise US tariffs on over 20,000 imported goods. This act was intended to provide revenue, regulate commerce with foreign countries, and encourage the industries to protect american labor.
Tulip mania reached it peak during this time and the tulip bulb market bubble eventually popped.