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Business Cycle & Government interaction in the economy

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Business Cycle & Government interaction in the economy. I. GDP. Gross Domestic Product (GDP) Dollar value of all final goods and services produced w/in a country’s borders Intermediate goods - used in the production of final goods

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i gdp
  • Gross Domestic Product (GDP)
    • Dollar value of all final goods and services produced w/in a country’s borders
      • Intermediate goods- used in the production of final goods
      • Final goods and services- products in the form sold to customers

C. Consumer Price Index (CPI) measures changes in the price level of consumer goodsand services purchased by households not including food and fuel (because it is too volatile)

  • The annual percentage change is used to calculate inflation the rise in the prices of goods and services in an economy over a period of time
  • CPI is used to determine the real value of wages salaries, pensions

ii phases in business cycle
II. Phases in Business Cycle

-Changes in GDP above or below normal levels. Four Phases:

  • Peak- when GDP stops rising, the height of economic expansion
  • Contraction- an economic decline marked by falling GDP, rising unemployment

Recession- prolonged contraction (6-18 months)

    • Depression- long and severe recession with high unemployment, low output
  • Trough- economy at lowest point in economic contraction


    • Period of economic growth as measured by rise in GDP
    • Business prosperity, falling unemployment
E. Fiscal policy- gov’t economic policy
  • Common fiscal policy in a crisis is lower taxes and increase spending, esp. public transfer payments (entitlements)
iii unemployment poverty
III. Unemployment & Poverty
  • Cyclical Employment- unemployment rises during economic downturns and falls when economy improves
  • Full Employment- unemployment rate 4-6%
  • Underemployment- people working at a job in which they are overqualified or part-time

4. Poverty rate- percentage of people who live in households below the poverty threshold(the income a person earns is not sufficient to support a household)

  • One person: $10,590
  • Two adults w/two children: $21,027 for dependents
iv government interventions
IV. Government Interventions
  • Entitlement programs
    • Medicaid, Food Stamps, WIC, FDC payments, federal jobs programs & training
  • Gov’t subsidized loans for college education
  • Federal Reserve
    • lowering interest rates so that companies can expand businesses & hire more workers
  • Taxation
    • Progressive tax rate & Income tax credit
v causes of great depression
V. Causes of Great Depression
  • Investing
    • 1925- stocks value $27 billion, 1929- stocks value $87 billion
    • Climb encouraged speculation- making investments with borrowed money in hopes of getting big return

Signs of Trouble from (1919-1929)

    • Large gap between rich and poor
    • Farmers and workers suffering financially once increased from WWI goes away
    • People going into debt buying consumer goods
    • Overproduction of consumer goods ->

Surpluses -> Fall in prices


The Crash

    • Overpriced stocks hit peak then began to fall
    • Brokers demand repayment from speculators
    • Black Tuesday (Oct 29, 1929), record 16.4 million shares sold


    • Falling prices -> deflation -> unemployment
    • Inaction from the Federal Reserve Bank

(currency tied to gold)

    • FDR’s “New Deal”
      • Major increase in social programs, public works, gov’t spending
      • Stopped contraction but not full recovery
    • WWII- economic recovery
vi types of investments
VI. Types of Investments
  • Buying stock
    • Stock is issued in portions known as shares- portions of the company
    • Corporations sell stock to raise money to start, run, or expand their business
    • Dividends- portion of profits shared with investors (size depends on company profits)
Types of corporations and stock
    • Closely held corporations- stock only offered to a few people (ex: family)
    • Publicly held corporations- many shareholders buy or sell stock on the open market
Common stock- voting owners of company, one vote per stock
  • Preferred stock- nonvoting members but receive dividends first
  • Mutual funds- collection of various stocks, usually less yield but less risk
  • Bonds- gov’t loans, less flexible and less yield but no risk