Chapter Opening Questions
Managers need to know:
- How monetary policies will affect business and affect their
customers, leads to stronger forecasts.
Summary
| 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 |
Monetary Policy
Explain how it affects the economy in your own words.
- Monetary Policy is the federal policy on money supply. The policy
replaces old bills with newer ones using the banks, which effects the
interest rate on newly circulated cash. Monetary Policy can slow the
economy down because of that and commonly leads to recession.
What do you need to watch to gauge changes in this?
- There are a few things to keep track of in order to gauge these
changes, watching the short term interest rates indicates whether the
economy is rising or falling. As I said above, Monetary Policies can
often slows the economy, so that should be watched as well, lastly, the
decrease in housing sales, construction employment decline and decline
in car sales can indicate economic status.s
Supply Shocks
Q1. Explain how it affects the economy in your own words.
- Supply Shocks happen when something happens to create a drastic
change in stock, like an attack on countries supplying oil or other
valuable goods leading to a halt in distribution, creating a Supply
Shock. Can affect the economy by overrunning the market or supply cutoff
leading to rising or falls of price.
Q2. What do you need to watch to gauge changes in this?
- Watch the news and keep up to date with current and past pricing on
valuable trade goods.
Credit Crunches
Q1. Explain how it affects the economy in your own words.
- When loans are unavailable the market becomes volatile because
people are unable to make big purchases like houses and cars causing
prices to fall.
Q2. What do you need to watch to gauge changes in this?
- Watch for when banks and treasuries wont take loans or want to end
loans early. Also watch for possible changes in regulations that
suddenly limit lenders ability to meet credit needs.
Waves of Optimism and Pessimism
Q1. Explain how it affects the economy in your own words.
- When a company isn’t quite sure of what to do in their industry and
they end up preparing for a recession it could cause other companies to
do the same thing which ends up supplying less to the consumers.
Q2. What do you need to watch to gauge changes in this?
- Important to watch over all companies in a certain industry in order
to follow the trends. When companies start making the same decisions its
a strong indication of where the economy is heading.
Consumer Confidence
Q1. Explain how it affects the economy in your own words.
- Consumer confidence is when consumers have no worries about the
economy, with no worries they spend money. When consumers don’t have
complete confidence with the economy they start saving money instead of
spending, leading to sales decrease and slowly to a recession.
Q2. What do you need to watch to gauge changes in this?
- The thing to watch is the sales of product. When the sales go down
the compaines will lose profit. The customer sales will show which
direction the economy is taking.
Fiscal Policy
Q1. Explain how it affects the economy in your own words.
- The changes the government makes to the economy like adjusting
spending or revenue leads to increases or decreases in economic
activity.
Q2. What do you need to watch to gauge changes in this?
- In order to gauge these changes watch the policies that the
government makes, they show the direction the economy is moving
towards.
Foreign Business Cycle
Q1. Explain how it affects the economy in your own words.
- The foreign business cycle is how the global economy runs, it has
affects on domestic economy because imported products that get used for
trade or manufacturing can have price changes that cause other
businesses to slow production and have adverse price changes too.
Q2. What do you need to watch to gauge changes in this?
- You would have to watch the majority of overseas prices and the
global economic status.
Trade Wars
Q1. Explain how it affects the economy in your own words.
- They can create restrictions on global trade, like when a tariff
gets enacted taxes on foreign products rise with the import tax.
Q2. What do you need to watch to gauge changes in this?
- Keep up to date with the world news and watch for tariffs that are
placed on valuable products, and the duty on the product that determines
the price the product is sold at.
Speculative Mania
Q1. Explain how it affects the economy in your own words.
- When people see a business doing well and decide to invest in the
market its considered Speculative Mania. As long as the demand exists
people will be making money, until the price has to change and the
demand decreases.
Q2. What do you need to watch to gauge changes in this?
- You should always watch how many people are in the market that you
are in and whether or not prices are on a rise or fall, when a market
starts to flood demand will decrease.
Economic terms
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.
Classical Economics
- It is the first people who started to look at the economy for
advise.
Keynesian Economics
- It is the use of policies to control the economy.
Milton Friedman
- He was a policy maker that helped balance economic growth during the
60’s.
The Federal Reserve Banks
- It is a part of the government that controls the monetary policy and
the government fiances.
Monetary Policy
- It is a part of the government that controls the monetary policy and
the government fiances.
Federal Funds Rate
- It is the target interest rate that commercial banks use when they
borrow money from the federal bank.
Time Lag
- It is the amount of time between events.
Real Interest Rates
- It is an interest rate that has been adjusted to inflation.
Yield Curve
- It is a curve on a graph where the fixed interest rate is
plotted.
Fiscal Policy
- Government spending and tax policies that influence the
economy.
Recession
- It is a time of economic decline where the GDP falls after
industrial trade and activity are reduced.
Leading Indicators
- Data that leads to the change in economy.
Economic events
Describe the characteristics of the following events briefly.
the 1990-1991 recession
- The post war recession that cut down on military spending. 8
months.
the 2001 recession
- less than 1% decline of GDP. 8 months.
the 1973-1975 recession
- period of economic stagnation due to post war expansion of
economy.
the Smoot-Hawley tariff
- Law set in place to protect policies.
the great tulip craze of Holland in 1636-1637
- Sudden rise in demand for the tulips caused the growers to increase
prices and then people stopped buying them and the price quickly
dropped.