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 the majority of time has very little impact on the overall economy. With this being said, monetary policy can have a tremendous impact on individual industries.
What do you need to watch to gauge changes in this?
In order to gauge upcoming policy it is important to stay up to date with the political climate within the country.
Q1. Explain how it affects the economy in your own words.
A supply shock in a rapid increase or decrease in the supply of a given commodity. This can cause the value of said commodity to become extremely volatile.
Q2. What do you need to watch to gauge changes in this?
While it is extremely hard to get an accurate picture of the supply of something, the supply can be monitored by paying attention to the value of the commodity.
Q1. Explain how it affects the economy in your own words.
A credit crunch can greatly nerf the ability for an economy to grow. This is due to it being much hard for companies to obtain loans to reinvest in the company.
Q2. What do you need to watch to gauge changes in this?
In order to watch this it is a good idea to keep a close eye on federal interest rates.
Q1. Explain how it affects the economy in your own words. Waves of optimism and pessimism can lead to shifts in every level of the economy. The average consumer will shift from spending money recklessly to saving an inpoportinate level of their income. The can lead to large swings in the demand for products.
Q2. What do you need to watch to gauge changes in this? A great way to determine this is to keep up with the overall tone of media headlines, as well as, what stocks are trading at compared to their intrinsic value.
Q1. Explain how it affects the economy in your own words. Consumer confidence affects the economy based on how willing people are to either spend or save.
Q2. What do you need to watch to gauge changes in this? It is important to watch the CCI released by FRED.
Q1. Explain how it affects the economy in your own words. Fiscal policy affects the short term health of the economy through spending from tax revenue.
Q2. What do you need to watch to gauge changes in this? Keeping up with the financial media to
Q1. Explain how it affects the economy in your own words. Foreign Business Cycles tend to closely follow the US economy.
Q2. What do you need to watch to gauge changes in this? It is important to keep an eye on other major markets such as he EU, China or Russia.
Q1. Explain how it affects the economy in your own words. With the increased globalization trade wars have an increasing large impact on the overall health of an economy.
Q2. What do you need to watch to gauge changes in this? A good gauge of this is to keep up with major news networks coverage of foreign affairs.
Q1. Explain how it affects the economy in your own words. Speculative Mania is what happens when the investing public gets excited and the market enters a bubble.
Q2. What do you need to watch to gauge changes in this? The consumer sentiment index a good gauge to watch for speculative mania. ## 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.
Classical economics was established in the late 18th century in the UK based off of free competition.
Keynseian economics the idea that spending of any kind, especially by the government will lead to a trickle down effect the will improve the economy at all levels.
Won Nobel Memorial Prize in Economic Sciences in 1976 for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy.
The federal reserve banks is the central bank managed by the federal government that lends to the major banks.
Monetary policy is policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing or the money supply
The federal funds rate targets interest rate set by the Federal open market committee.
Time lag is the time it takes for policy to take effect.
The real rate of interest after accounting for inflation.
A yield curve is a line that plots interest rates of bonds having equal credit quality but differing maturity dates
Fiscal Policy is the affect the government spending and taxation has on the economy.
A recession is a downturn in a nations economy
The leading indicators are economic factors that may cause or lead to a recession.
Describe the characteristics of the following events briefly.
The 1990-1991 recession was caused by the plumpting of consumer
confidence caused by the gulf war. Consumers were refusing to spend
money in order to save money for the impending war.
### the 2001 recession The 2001 recession was caused by the collapse of
the “.com” bubble. This was caused by overarching speculation that the
internet age was the new gold rush. This led investering dumping money
into every tech start up and continuing to purchase overvalued stock.
### the 1973-1975 recession From 1973 to 1975 poor crop harvests caused
rising food prices caused a supply shock leading to a recession.
Following the great depression, US congress implemented the Smoot-Hawley tariff with the goal of reducing US imports. This was done with the goal of increasing US independence. This is turn started a trade war.
The great tulip bubble of 1636-1637 is a great example of what happens when speculative mania takes over. Similar to what happened with the .com bubble in 2001 the price of tulips have continued to increase for so long everyone continued to blindly invest.