Chapter 6
The Health of the Economy
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Section 6.1
Economic Ups and Downs

Objectives




Describe the phases of the business cycle;
Analyze the effects of economic conditions on
consumers;
Discuss factors that affect the state of the
economy; and
Explain measurements used to gauge the state of
the economy.
2
Business Cycle – the ups and downs of the
economy
Peak
Expansion
Contraction
Trough
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Types of Business Cycles
Contraction – business activity slows down
•If the contraction last long enough and is
deep enough, the economy goes into
recession
Trough – at the lowest point in the cycle,
business activity levels off
Expansion - the economy begins to recover
•People spend more money and open more
businesses, demand brings more
production of goods and services and
employment rises
Peak – a period of prosperity marks the highest
point of the cycle
•Eventually, however a contraction occurs and
the cycle starts over again
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Recession – is a period of significant decline in
the economy
Lasts about 6 months  1 year
•The economy produces more than people
can consume
•Businesses don’t make money and have to
lay off workers
•Workers don’t have money and therefore
cannot spend
•Recession can lead to DEPRESSION
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Depression – a major economic slowdown,
longer lasting and more serious
The Great Depression – dominated the world
economy in the 1930’s
•Some believe that the stock market crashing
had very little to do with it, they believe it
was poor policy decisions by the
government
•Lasted until WWII
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Inflation – prolonged rise in the price of goods
and services
•It affects consumers by reducing their
purchasing power
•When prices rise sharply, your dollar buys
fewer goods and services than before
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Interest – fee paid for the opportunity to use
someone else’s money over a period of time
•Inflation also affects consumers who borrow,
lend, or invest money
•Inflation can also benefit someone who has
borrowed money at a fixed interest rate
that is lower than the rate of inflation
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Factors Affecting Ups and Downs
•Consumer Confidence
Psychological factor – based on the
feelings of the consumer
•Technological Innovation
Spurred by inventions
Can transform the economy, the workplace,
and the culture
•Government Policies
Can either help or hurt the economy
•War
Government pumps billions of dollars into
the economy to support troops in
need of goods and services
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Measuring the Economy’s Performances
Economic Indicators – measurements used to
monitor the health of the economy
•Gross Domestic Product (GDP) – is the total
dollar value of goods and services
produced in a country during the year
•Unemployment Rate
High unemployment rate means the
economy is ailing
•Consumer Price Index (CPI) – measures the
change in prices over time of a specific
group of goods and services
Market Basket – 200 categories of goods
and services that average household uses
Each month the Bureau of Labor
Statistics reports the percentage
change in CPI
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Local, National, and Global Economics
Conditions Affecting the Economy
•Weather
•Natural disasters
•Population shifts
•Availability of workers
•Local government policies
•Fortunes of local businesses
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Section 6.2
Deficits and Debt

Objectives



Distinguish between a budget surplus and a budget
deficit;
Identify reasons for deficit spending by
governments; and
Analyze the effects of the national debt on
consumers.
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The Budget Process
Budget – is an estimate of anticipated income and
expenses for a certain period of time.
•It is created by federal, state, and local
governments
•It is based on Fiscal Year (Begins Oct. 1 each
year)
•The goal is to balance the budget so that
planned spending does not exceed
projected revenue
•The house approves final budget, then
becomes law
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Budget Surplus – when more money was
collected than spent at the end of the
fiscal year.
•More common to be the opposite
Deficit Spending – the practice of spending
more money than was received in
revenue
Budget Deficit – the amount by which
spending exceeds revenue
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Various Causes of Budget Deficits:
•War
•Recession
•Policy decisions by Congress and President
National Debt – (Public Debt) total amount of
money that the federal government owes
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Government Also Needs to Borrow Money
Selling various types of securities:
•Saving Bonds
•Treasury Bills
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What’s the Impact?
•Some are not worried about the debt, because
it has decreased since WWII
•Some are worried, because the interest takes
up about 10-20% of the federal budget
each year
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Section 6.3
Stabilizing the Economy

Objectives



Compare and contrast fiscal and monetary policy;
Explain the role of the Federal Reserve System; and
Analyze how the Fed’s actions affect consumers.
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Section 6.3
Stabilizing the Economy
Two Types of Policies
1. Fiscal Policy – refers to the federal
government’s use of taxing and spending
policies to help stabilize the economy
• They raise or lower taxes and increase
or decrease government spending
• Can take months before it affects the
economy
• Carried out by the President and
Congress
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2. Monetary Policy - to regulate the money
supply
•Money Supply – total amount of
money in circulation at any given
time
•Carried out by nations central bank
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The Federal Reserve System – (Fed) is the
central bank of the U.S.
•Provides financial services to the banking
industry and government
•It regulates banks to make sure that they
follow the law
•Primary responsibility is to set Monetary
Policy
•Federal Reserve Board – (Board of
Governors) runs the Federal Reserve
System.
•Federal Open Market Committees
(FOMC) – seven members nominated by
the President and five presidents of
district Federal Reserve Banks.
•Their decisions affect the stock market
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The Fed and the Money Supply
•Increase money supply, credit becomes
more available and less costly, which
helps consumers and businesses to
spend more
•Decrease money supply, credit becomes
harder to get and more expensive, which
causes consumers and businesses to
spend less
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Fed can manipulate the money supply in
three ways:
1. Engage in open market operations
2. Raise and lower the discount rate
3. Adjust the reserve requirement
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Open Market Operations
•Most frequently used tool in selling or
buying government securities – stocks,
bonds, and other financial assets in the
open market
•Decreased money supply, government sells
holdings of government securities,
buyers will pay for these and therefore
takes money out of the circulation
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•Opposite affect cause them to buy
securities, which puts money back into
circulation
•Federal Funds Rate – this is the interest
rate at which banks lend money to one
another overnight
•Not controlled by the Fed, but
strongly influenced
•Tends to trigger changes in the
interest rate that financial
institutions charge consumers and
businesses
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The Discount Rate
•Sometimes banks have to borrow money
from the Fed to encourage them to give
discounts to consumers and businesses
•Discount Rate – interest rate that banks
pay to the Fed.
•The direct affect of the discount rate on
money supply is usually very small
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Reserve Requirements
•Reserve Requirements - The % of a
bank’s deposit that it must keep on hand
•Holding money in reserve helps take money
out of circulation.
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Effects on Consumers
•What you’ll pay for goods and services
•Your ability to get credit and the interest
rates you will pay
•What you will earn in interest
•Your job stability and the wages you are
paid
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