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Business Cycle: The Role of Government

Business Cycle: The Role of Government. Goals, Laws, Authorities, and Policies . Business Cycles. Business cycles are fluctuations in the level of economic activity, alternating between periods of recession and prosperity. Peak. Peak. Expansion. Peak. Expansion. Contraction. Trough.

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Business Cycle: The Role of Government

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  1. Business Cycle: The Role of Government Goals, Laws, Authorities, and Policies

  2. Business Cycles • Business cycles are fluctuations in the level of economic activity, alternating between periods of recession and prosperity. Peak Peak Expansion Peak Expansion Contraction Trough Contraction Trough

  3. Business Cycles • Business cycles are comprised of four phases: • Recession • Rate of growth in GDP falls, unemployment increases, excess capacity increases, inflationary pressures decrease, and profits fall. • Trough • Expansion • Rate of growth in GDP rises, unemployment decreases, excess capacity decreases, inflationary pressures build, and profits rise • Peak

  4. A Brief History of Business Cycles: The USA • Expansions • 1945:4-1948:4 13 • 1950:1-1953:2 14 • 1954:3-1957:3 13 • 1958:2-1960:1 8 • 1961:1-1969:3 35 • 1971:1-1973:4 12 • 1975:2-1980:1 20 • 1980:3-1981:3 5 • 1982:4-1990:3 32 • 1991:3-2001:1 97 Recessions 1949:1-1949:4 4 1953:3-1954:2 4 1957:4-1959:1 2 1960:2-1960:4 3 1969:4-1970:4 5 1974:1-1975:1 5 1980:2-1980:2 1 1981:4-1982:3 4 1990:3-1991:2 4 2001:1-

  5. Economic Stabilization: Policies • Economic policies used by the federal government to counter the cyclical fluctuations in economic activity • Monetary Policy • Uses changes in the rate of growth in the money supply to bring about changes in the level of economic activity • Fiscal Policy • Uses changes in government spending and taxes to bring about changes in the level of economic activity.

  6. Economic Stabilization: Goals • Price Stability • Maintenance of an unchanged general level of prices over time. • Full Employment • Full utilization of all available labor and capital. • Economic Growth • Growth of real output over time.

  7. Economic Stabilization: Laws • The Federal Reserve Act (1913) • Establish a central bank, furnish elastic currency, provide a lender of last resort, supervise the banking system. • The 1946 Employment Act • Formulate and execute policy to promote maximum employment, production and purchasing power.

  8. Economic Stabilization: Laws • The 1978 Humphrey-Hawkins Act • Provide employment and price objectives as well as money growth targets. • The 1980 Monetary Control Act • Deregulate the banking system.

  9. THE PRESIDENT CONGRESS FEDERAL RESERVE FEDERAL AGENCIES BUDGET TAXES SPENDING MONETARY POLICY FISCAL POLICY REGULATORY POLICY

  10. Economic Stabilization: The Authorities • The Congress • House of Representatives • Elected every 2 years: 435 Members • Senate • Elected every 6 years: 50 Members • The President of the United States • Elected every 4 years • The Federal Reserve

  11. Stabilization Authorities: Congress • Congress implements the nation’s fiscal policy. • Congress produces the government’s annual budget. • Congress determines spending levels for the government. • Congress enacts tax laws for the nation.

  12. Stabilization Authorities: President • The President and his staff prepare an annual economic report that reviews the state of the economy. • The President submits an annual budget, but Congress has fiscal authority. • The President must influence members of Congress to adopt his budget priorities.

  13. Stabilization Authorities: The Fed • The Federal Reserve is the central bank of the United States. • The Federal Reserve was established by an Act of Congress in 1913. • It is an independent organization that reports to Congress, but does not receive any financing from the government.

  14. THE FEDERAL RESERVE SYSTEM Board of Governors (7 appointed members) Determines reserve requirements and approves changes in the discount rate. Supervisory and regu- latory responsibilities over member banks and holding companies. Oversight of Federal Reserve Banks. Federal Reserve Banks (12 District Banks) Handle reserve balances for banks. Furnish currency. Collect, clear , & transfer funds. Handle U.S. government debt and cash balances. Establish discount rate and furnish loans at discount window. Federal Open Market Committee (12 members) Meets 8 times a year in Washington, D.C. Formulates monetary policy directives implemented through open market operations. Reserve Requirements Discount Rates Open Market Operations

  15. The 12 Federal Reserve Banks Minneapolis New York Boston Chicago Philadelphia Cleveland Washington San Francisco St. Louis Richmond Atlanta Kansas City Dallas

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