The Business Cycle. jobs and spending. How do we know if the economy is prosperous or in a depression?

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1 The Business Cycle Consumers spend their money to buy products then production increases How do we know if the economy is prosperous or in a depression? Lots of jobs and money Spending slows and jobs begin to Increase decrease in jobs and spending Hard to find a job and money is tight

2 The Government s Goals of the US Economy 1. Economic Growth = production increases 2. Price Stability = prices don t change radically 3. Full Employment = everyone has a job

3 Economic Indicators 1) Gross Domestic Product (GDP) -Total of all goods and services produced in the country GDP = Consumer Spending + Gov. Spending + Investments + Exports Imports 2) Unemployment Rate -% of people who want a job but can t find one 3) Consumer Price Index (CPI) -Measures the change in prices (3% average increase each year)

4 Inflation The increase in the cost of goods and services Caused by an increase in the amount of money in circulation

5 Hyper inflation Sometimes inflation rates get so high that money has no value The money is worth less than the paper it s printed on

6 Zimbabwe Dollar In Zimbabwe, inflation is so bad that nobody will accept the Zimbabwe Dollar any more A few years ago, it cost billions of dollars for a loaf of bread, but now, no amount of Zimbabwe dollars can buy one. Today you would need all the money in Zimbabwe to equal 1 US Dollar.

7 Affecting the Economy Fiscal Policy: governments use of taxing and spending as a way to influence the economy - Controlled by Congress and the President Expansionary Fiscal Policy = government actions to speed up the growth of the economy Spending Taxes Contractionary Fiscal Policy = governments actions to slow down the growth of the economy Spending Taxes

8 Political Cartoon Practice

9 Bank of the United States The Federal Reserve System (The Fed) the central bank of the United States controls monetary policy Monetary Policy the Federal Reserve s manipulation of the money supply as a way to influence the economy Janet Yellen Chairman of the Fed

10 3 Ways to Affect the Economy 1) Open Market Operations - buying and selling securities from the people 2) Discount Rate -interest rate that The Fed charges private banks when they borrow money 3) Reserve Requirement - the amount of money that private banks are required to keep in their accounts

11 Open Market Operations The Fed buys Securities The Fed pays people for them and money gets released into the economy The Fed sells Securities people pay The Fed for them and money gets stuck in the Federal Reserve

12 Discount Rate (Interest Rate) The Fed lowers the discount rate money gets released into the economy because private banks can borrow more The Fed raises the discount rate money gets stuck in the Federal Reserve because private banks can t afford to borrow as much

13 Reserve Requirement The Fed lowers the reserve requirement money gets released into the economy when private banks lend more to people The Fed raises the reserve requirement money gets stuck in private banks vaults

14 Affecting the Economy Monetary Policy: governments use of taxing and spending as a way to influence the economy Expansionary Monetary Policy = The Federal Reserve s actions to speed up the growth of the economy Buys Securities Spending Lowers Discount Rates Lowers Reserve Requirement Contractionary Monetary Policy = The Federal Reserve s actions to slow down the growth of the economy Sells Securities Raises Discount Rates Raises Reserve Requirement

15 What Should the Government do if the Economy is in a Recession? If the Economy is in a recession Fiscal Policy Fixes: Taxes & Govt. Spending Monetary Policy Fixes: Reserve Requirement & Discount Rate & Interest Rates (Buying Securities) The Economy should recover and expand!

16 What Should the Government do if the Economy has High Inflation? If the Economy has High Inflation Fiscal Policy Fixes: Taxes & Govt. Spending Monetary Policy Fixes: Reserve Requirement & Discount Rate & Interest Rates (Sell Securities) Prices will decrease, helping the economy expand