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 is action from a government or monetary authorities in order to create and or control economic growth. They do this for a number of reasons including delaying recession and stabilizing inflation. These policies can boost or cause a drop in employment.
What do you need to watch to gauge changes in this? Most changes in monetary policy come when unemployment and inflation are changing. The fed publishes all of their data so you can see the changes being made. When inflation is high look for rate hikes.
Q1. Explain how it affects the economy in your own words.
Supply shocks will obviously affect our economy as we rely heavily on supply and demand. Depending on the type of supply shock and how hard the supply is hit it will make prices go up or down. This can lead to prosperous times for a little while as well as lead to economic turmoil, depending on which way the supply was shocked.
Q2. What do you need to watch to gauge changes in this?
You will need to watch supply changes as well as current events that may cause a good’s supply to get out of a normal load. ## Credit Crunches
Q1. Explain how it affects the economy in your own words.
Credit crunches can stifle economic growth and prevent bankers from doing business which will reduces people’s ability to borrow.
Q2. What do you need to watch to gauge changes in this?
You need to watch the trends of how banks are lending money. This was paint a picture for what they are predicting will happen. See if they are carelessly racking up debts.
Q1. Explain how it affects the economy in your own words.
Optimism brings higher consumer spending, higher job rates as well as more investments among other positive economic growth. Pessimism can lead an economy into recession.
Q2. What do you need to watch to gauge changes in this?
Companies’ recent purchases as well as current events and GDP can all help gauge the level of optimism or pessisism in our economy.
Q1. Explain how it affects the economy in your own words.
Consumer confidence can affect the economy in both good and bad ways. If consumers are overly confident in a market it may lead to overspending which will be good for the economy in the short run, but may affect a customer’s purchasing power down the line. If a customer is not confident they will spend less which may lead to not enough money flowing in our economy thus causing a recession.
Q2. What do you need to watch to gauge changes in this?
Watching current political events which may sway consumers from or to purchases, as well as pricing. Low prices cause consumers to spend more and vice versa.
Q1. Explain how it affects the economy in your own words.
Government spending affects all of us through taxes and business spending. If a government is spending a lot of money taxes are expected to be raised for both consumers and businesses which will affect spending.
Q2. What do you need to watch to gauge changes in this?
Understanding current politics and monitoring where and what they are spending money on. ## Foreign Business Cycle
Q1. Explain how it affects the economy in your own words.
We are reliant for imports of other foreign goods which means we have to watch and pay attention to what is going on politically and fiscally in foreign countries as we rely on many of their imports.
Q2. What do you need to watch to gauge changes in this?
Political events oversees as well as natural disasters and foreign affairs between two foreign entities such as wars. ## Trade Wars
Q1. Explain how it affects the economy in your own words.
Trade wars can have affects that imply to our lives and the lives of those overseas. This can slow our economy by affecting the supply chain.
Q2. What do you need to watch to gauge changes in this?
Watching current geopolitical affairs as well as paying attention to any trade tariffs, or transport issues that may affect our suuply chain.
Q1. Explain how it affects the economy in your own words.
Industries that don’t offer needs, but are built more on money grabs among other wants can tend to get heavily over inflated as excited people will see a company going up and want to get in on the action. This is over-speculation. Q2. What do you need to watch to gauge changes in this?
You need to monitor what industries are growing because of good productive growth and what industries are over inflated and may not offer that much value or at least as much value as people are speculating about it. ## 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.
The idea that free trade and competition for jobs created a healthy economy. This is considered a long term economic theory.
An economic theory that promotes government intervention during recessions or downturns. Much more of a short term theory.
An economist that believed companies should focus on trying to maximize returns for shareholders. He won Nobel prize for economic sciences.
The United States’ central banking system that operates in the interest of the public
Laws or guidelines a government sets to control a countries economic supply and growth.
The rate of interest that banks charge each other to borrow money quickly.
The delay between economic actions and the consequences that occur from said actions.
The interest rate a investor is given after inflation occurs.
A chart that measures investors feelings on risk.
The money a government spends to boost a countries outlook such as infrastructure. Fiscal policy is also tax policies a country has.
A long period of economic downturn in which unemployment and inflation typically rise. Trade and other expenditures are reduced. This is defined by a fall in GDP for two consecutive fiscal quarters.
Data from economic reports that can help alert a recession may be near.
Describe the characteristics of the following events briefly.
Unrest in the middle east in some of the U.S’s largest oil importers caused a price shock for oil. Combine that with high inflation rates and the U.S was sent into a recession that lasted about 8 months.
Declining business investments and declining automotive jobs resulted in job losses for 2.2 million workers. Along with the 9/11 attacks the fed made the choice to lower federal funds rates in an effort to increase customer confidence.
This two year recession was caused by a ban on oil exports as well as the cost of the Vietnam war. On top of that wall street crashed causing a long recession.
This tariff regulated the import of commercial good and placed restrictions on over 20,000 imported goods.
The price of tulips became greatly inflated causing consumers and buyers to exit the market which drove demand into the ground causing the market to crash.