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.
A change in the economies interest rates.
What do you need to watch to gauge changes in this?
watch short-term interest rates and the yield curve
Q1. Explain how it affects the economy in your own words.
A change in output causing a change in prices
Q2. What do you need to watch to gauge changes in this?
know the quantity of product and how many people need it
Q1. Explain how it affects the economy in your own words.
When loans are not available, leading to recession because there is a lack of credit
Q2. What do you need to watch to gauge changes in this?
be aware of the possibility of changes in regulations that suddenly limit lenders’ ability to meet the credit needs of their usual customers
Q1. Explain how it affects the economy in your own words.
optimism leads to more spending and new projects while pessimism leads to a significant decrease in capital spending
Q2. What do you need to watch to gauge changes in this?
be aware of what other people are thinking
Q1. Explain how it affects the economy in your own words.
a drop in consumer confidence can lower consumer spending which may eventually lead to a recession
Q2. What do you need to watch to gauge changes in this?
pay attention to confidence. high leads to a stronger economy, more consumer spending and low confidence, more consumer saving could mean the economy is in trouble
Q1. Explain how it affects the economy in your own words.
changes in government spending and taxation which can increase or decrease economic activity in the short term
Q2. What do you need to watch to gauge changes in this?
changes in levels of taxation and increase in government spending
Q1. Explain how it affects the economy in your own words.
the changes of economic activity in foreign countries that affect countries economies that they trade with
Q2. What do you need to watch to gauge changes in this?
be aware of international events that could lead to changes of economic activity
Q1. Explain how it affects the economy in your own words.
lack of product due to restrictions causing inflation of that product
Q2. What do you need to watch to gauge changes in this?
when a country imposes new taxes on imports
Q1. Explain how it affects the economy in your own words.
it can lead to a crisis of consumer confidence
Q2. What do you need to watch to gauge changes in this?
identifing speculative mania can help you follow market trends and make smarter future decisions
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 biggest economic advantages from personal wealth interests for everyone. Focuses on economic growth and economic freedom. Classical Economics is known as the first modern school of economic thought.
Output is affected by rigid prices and changes in spending such as government spending, investment, and consumption. The government plays a more active role.
An economist that created an economic theory, monetarism
ensures the stability and safety of individual financial institutions and monitors their effects on the overall financial system
controlling the amount of money in the economy and the methods used to create more money
the interest rate on overnight loans among banks
the time between an event and the result
a changed interest rate after inflation is considered
plotted interests rates that create a line to show maturity of interest rates
changes in government spending and changes in taxation that impacts the economy
significant decrease in economic activity
predicted measurement
Describe the characteristics of the following events briefly.
caused by job cuts and lasted about 8 months
occurred after a long period of growth, raised interest rates and resulted in significant decrease in total employment
caused by the raise of gas prices, large government spending on the Vietnam War, and Wall Street stock crash
a law signed by President Herbert Hoover that increased taxes on multiple imported goods
the prices of tulips significantly increased and no one wanted to buy them and the demand for tulips decreased which is a supply shock