Managers need to know: How to plan for and spot a recession before it hits.
| 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 |
Q1. Explain how it affects the economy in your own words.
Monetary policy affects the economy because it can affect the real interest rates, which can alter the demand and output.
Q2. What do you need to watch to gauge changes in this?
You can watch the federal funds rates.
Q1. Explain how it affects the economy in your own words.
When there is a positive supply shock it’ll increase output which causes prices to decrease. And then when there is a decrease supply it’ll decrease output which causes prices to increase.
Q2. What do you need to watch to gauge changes in this?
Watch for unexpected outputs or disrupts in the supply chain.
Q1. Explain how it affects the economy in your own words.
It can stunt the growth of the economy through decreased capital liquidity
Q2. What do you need to watch to gauge changes in this?
Watch lending activities by financial institutions.
Q1. Explain how it affects the economy in your own words.
If I’m understanding Waves of Optimism and Pessimism correctly it seems like a risky decision a business has to make. Which can affect the economy positively or negatively, it really depends on the outcome from the business decision.
Q2. What do you need to watch to gauge changes in this?
I would stay up to date on companies and stay on top of their recent purchases, and then you might be able to get a clue if their company will be affected positively or negatively.
Q1. Explain how it affects the economy in your own words.
Whatever consumers are buying, it’ll affect the economy. Most likely in a positive way too.
Q2. What do you need to watch to gauge changes in this?
Watch what consumers are spending their money on, it seems fairly predictable.
Q1. Explain how it affects the economy in your own words.
Its the governments way of spending and use of tax policies.
Q2. What do you need to watch to gauge changes in this?
Watch if the government is either increasing or decreasing their economic activity.
Q1. Explain how it affects the economy in your own words.
The international trades can affect the US economy big time, we saw this during the heat of Covid-19.
Q2. What do you need to watch to gauge changes in this?
See if there are recessions going on around the world, because it might affect the US economy negatively.
Q1. Explain how it affects the economy in your own words.
Having to pay more for raw materials will cause products to go up in price.
Q2. What do you need to watch to gauge changes in this?
If you are buying supplies I would look around a few times before you buy the first number you come across.
Q1. Explain how it affects the economy in your own words.
This is when there is a sharp, steep rise in prices that are fueled by the markets momentum. In crypto currency talk this is what happened with DogeCoin.
Q2. What do you need to watch to gauge changes in this?
Watch what is being inflated in the stock market, and or crypto market.
Explain 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 old way of political economy that took place late 18th and early 19th century.
Various macroeconomic theories and models that show demand and strong influences economic output and inflation.
American economist and statistician who received a Nobel Prize in 1976 for his Economic Sciences.
The central banking system of the United States.
Actions that are supposed to control a nations overall money supply and achieve economic growth.
The interest rates that banks charge to one another to borrow or lend excess reserves overnight.
Delay between an economic action and a consequence.
It is an equation 1 + i = (1+r)(1+πe)
Used in finance, it is a type of chart showcasing a curve.
Government spending and tax policies that influence economic conditions.
Significant decline in economic activity.
An economic factor that can be used to predict which way a market or economy may go in the near future.
Relevant events that have economic significance.
Describe the characteristics of the following events briefly.
It was a recession that lasted 8 months and had multiple factors for it happening, the Persian Gulf crisis was one of them.
Another 8 month recession, and there was a big drop in manufacturing across sectors.
It was a period of economic stagnation in the western world.
Tried to protect farmers and other industries from foreign competitors.
One of the most famous market bubbles and crashes of all time.