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Economics 2/14/11 mrmilewski

Economics 2/14/11 http://mrmilewski.com. OBJECTIVE: Demonstration of Chapter#12 and begin examination of the business cycle. I. Administrative Stuff -attendance & distribution of test II. Chapter#12 Test III. Journal #31 pt.A -Examine the cartoon p.343

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Economics 2/14/11 mrmilewski

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  1. Economics 2/14/11 http://mrmilewski.com • OBJECTIVE: Demonstration of Chapter#12 and begin examination of the business cycle. • I. Administrative Stuff -attendance & distribution of test • II. Chapter#12 Test • III. Journal #31 pt.A -Examine the cartoon p.343 -Answer the caption question p.343 -Examine Figure 13.2 -Answer the caption question p.345 • IV. Journal #31 pt.B -notes on the business cycle

  2. This week • Chapter#13 section#1 • Chapter#14 section#1 • Chapter#14 section#3 • Chapter#13&14 Test is Friday! • Progress Report Distributed Tomorrow!

  3. ACT Testing Schedule • Testing will run from 7:41-10:45 (1st hour through 1st lunch) · February 17, Mr. Milewski’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 · February 18, Ms. Pampu’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 · February 23, Ms. Miah’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 · February 24, Ms. Woodruff’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 • On their testing day, the ACT students will follow the lunch schedule as follows: • 1. If they normally have 1st lunch: go to 3rd hour then 3rd lunch (missing the second part of 3rd hour. • 2. If they normally have 2nd lunch: go to 2nd lunch, then report to the second part of 3rd hour at 11:20. • 3. If they normally have 3rd lunch: go to 3rd hour then 3rd lunch.

  4. The Business Cycle • Business cycle - the rise and fall of GDP over time. • GDP – Gross Domestic Product • GDP= C+I+G+(X-M) • C – consumer • I – business • G – government • X – exports • M - imports

  5. Phases of the Business Cycle • Ch#14 sec#1 p.376

  6. The Recession Phase of the Business Cycle • There are two phases of the business cycle • Recession – when real GDP declines for two quarters in a row (6 months) • A recession begins following a peak • Peak – the point where GDP stops going up • A recession ends at a trough • Trough – the turnaround point where GDP stops going down.

  7. The Expansion Phase of the Business Cycle • Expansion – period of recovery from a recession. • Expansion begins at the trough of the business cycle. • Expansion ends when the business cycle reaches a new peak. • Since WWII, the average recession lasted 11 months. The average expansion lasted 43 months. • The expansion that began in March 1991 & almost ended in March 2001 is the longest in history. (1st and 3rd quarters of 2001 GDP dropped)

  8. CPI 2002-2011

  9. US Real GDP 2006-2010 http://www.finfacts.com/artman/uploads/3/US-gdp-Q3-2009_oct292009.jpg

  10. US Real GDP 1999-2009 http://www.econedlink.org/lessons/images_lessons/904_em904_figure11.jpg

  11. US Real GDP 1990-2006 http://www.econedlink.org/lessons/images_lessons/756_756_figure1311.jpg

  12. Real GDP v. Unemployment http://jmuservice.com/img/news/US_Real_GDP_&_Unemployment_Rate.jpg

  13. GNP v. GDP • GDP- the dollar value of all final goods and services produced within a country’s national borders in a year. • GNP- the dollar value of all final goods, services, and structures produced with labor and property supplied by a countries residents.

  14. Depression • If a recession becomes very severe, it may turn into a depression • A depression is a state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants • Between 1929 and 1933, GDP declined nearly 50% and unemployment rose 8 times!

  15. Depression • Currency was in such short supply that towns, counties, chambers of commerce, and other civic bodies resorted to printing their own money, known as depression scrip • Several factors contributed to the Great Depression • One was the disparity in the distribution of income • Easy and plentiful credit also appears to have played a role • Global economic conditions also played a part as American tariffs on imports kept many countries from selling goods to the United States

  16. Economics 2/15/11 http://mrmilewski.com • OBJECTIVE: Examine of the business cycle. • I. Journal #32 pt.A -Questions on Econ U.S.A. episode#3 • II. Quiz#19 • III. Return of Chapter#12 Test • IV. Journal #32 pt.B -notes on the business cycle

  17. Econ U.S.A. episode #3 • 1.) Why was Congress unable to determine the true severity of the Great Depression? • 2.) What was the result of this problem? • 3.) How did the U.S. Government prepare economically for WWII? • 4.) How does government spending affect the circular flow? • 5.) How did the environmental concerns of the 1970’s effect the economy? • 6.) How does the government know if the policies they enact have helped the economy?

  18. This week • Chapter#13 section#1 • Chapter#14 section#1 • Chapter#14 section#3 • Chapter#13&14 Test is this Friday!

  19. Figure 13.3Circular Flow of Economic Activity

  20. The End of the Depression • Massive government spending during World War II added a huge stimulant to the economy for most of the early 1940s • Recession returned in 1945, but it did not last • As soon as the war was over, consumers went on a buying binge that stimulated expansion again • Since 1965, there has been a recurring pattern of recessions and expansions • After 1980, however, recessions occurred less frequently • The expansion that began in 1991 is the longest expansion in United States history

  21. Why Business Cycles? • No one theory seems to explain past business cycles, or serves as a way to predict future ones • Changes in capital expenditures are one cause of business cycles • When the economy is expanding, businesses expect future sales to be high, so they invest heavily in capital goods • After a while, businesses may decide they have expanded enough and they begin to pull back on their capital investments

  22. Inventory Adjustments & Innovation • Inventory adjustments, or changes in the level of business inventories, are a second possible cause of business cycles • Some businesses cut back on inventories at the first sign of an economic slowdown and then build them back up again at the first sign of an upturn • When a business innovates, it often gains an edge on its competitors because its costs go down or its sales go up • The imitating companies must invest heavily to do this, and an investment boom follows

  23. Monetary Policy • A fourth possible cause of business cycles is the credit and loan policies of the Federal Reserve System • When “easy money” policies are in effect, interest rates are low and loans are easy to get • Eventually the increased demand for loans causes interest rates to rise, which in turn discourages new borrowers • As borrowing and spending slow down, the level of economic activity declines

  24. Shocks • A final potential cause of business cycles is external shocks, such as increases in oil prices, wars, and international conflict • Some shocks drive the economy up, as when Great Britain discovered North Sea oil in the 1970s • Other shocks can be negative, as when high oil prices hit the United States in the early 1970s

  25. Economics 2/16/11 http://mrmilewski.com • OBJECTIVE: Examine of the effects of monetary policy on the business cycle & types of inflation. • I. Journal #33 pt.A -Read “Business Week Newsclip” p.362 -Answer questions (1-2) p.362 • II. Journal #33 pt.B -notes on the business cycle • III. Journal #33 pt.C -notes on the Commanding Heights (episode#2 day#2)

  26. ACT Testing Schedule • Testing will run from 7:41-10:45 (1st hour through 1st lunch) · February 17, Mr. Milewski’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 · February 18, Ms. Pampu’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 · February 23, Ms. Miah’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 · February 24, Ms. Woodruff’s 2, 3, 4 hours will test in the library all together from 7:40-10:40 • On their testing day, the ACT students will follow the lunch schedule as follows: • 1. If they normally have 1st lunch: go to 3rd hour then 3rd lunch (missing the second part of 3rd hour. • 2. If they normally have 2nd lunch: go to 2nd lunch, then report to the second part of 3rd hour at 11:20. • 3. If they normally have 3rd lunch: go to 3rd hour then 3rd lunch.

  27. Shocks • A final potential cause of business cycles is external shocks, such as increases in oil prices, wars, and international conflict • Some shocks drive the economy up, as when Great Britain discovered North Sea oil in the 1970s • Other shocks can be negative, as when high oil prices hit the United States in the early 1970s

  28. Inflation • Inflation is a special kind of economic instability, one that deals with changes in the level of prices rather than the level of employment and output • To better understand inflation, we must first examine how it is measured • Then we can examine the causes of inflation and its consequences • In order to find inflation, we start with the price level, the relative magnitude of prices at one point in time • To measure the price level, economists select a market basket of goods

  29. CPI • They then construct a price index such as the consumer price index (CPI), the producer price index, or the implicit GDP price deflator • Prices tend to rise faster during expansions and then slow down during recessions • On rare occasions, unusual circumstances may cause deflation, or a decrease in the general price level

  30. Figure 14.5 The Rate of Inflation

  31. Types of Inflation • Creeping inflation - inflation in the range of 1 to 3 percent per year • Galloping inflation - a more intense form of inflation that can go as high as 100 to 300 percent • When inflation gets totally out of control, hyperinflation - inflation in the range of 500 percent a year and above–occurs

  32. Causes of Inflation • Nearly every period of inflation is due to one of the following causes • First explanation demand-pull theory - all sectors in the economy try to buy more goods and services than the economy can produce • As C + I + G converge on stores, shortages occur and prices go up

  33. Causes of Inflation • Second explanation - federal government’s deficit - blames inflation only on the federal government’s deficit spending • Third explanation claims that rising input costs (cost push)–especially labor–drive up the cost of products for manufacturers and cause inflation

  34. Causes of Inflation • Still another explanation says that no single group is to blame for inflation • According to this view, a self-perpetuating wage/price spiral of wages and prices begins that is difficult to stop • The final and most popular explanation for inflation is excessive monetary growth • This occurs when the money supply grows faster than real GDP • Inflation cannot be maintained without a growing money supply to fuel it

  35. Consequences of Inflation • When inflation is present, it can have a disruptive effect on an economy for several reasons • The most obvious effect of inflation is that the dollar buys less

  36. Consequence of Inflation • Decreased purchasing power is especially hard on retired people with fixed incomes because their money buys a little less each month • A second destabilizing effect is that inflation can cause people to change their spending habits, which disrupts the economy • A third destabilizing effect of inflation is that it tempts some people to speculate heavily in an attempt to take advantage of a higher price level • Finally, inflation alters the distribution of income • During long inflationary periods, lenders are generally hurt more than borrowers • Loans made earlier are repaid later in inflated dollars

  37. Economics 2/17/11 http://mrmilewski.com • OBJECTIVE: Examine the Role of the Federal Reserve. • I. Journal #34 pt.A -Read “The Global Economy” p.420 -Answer questions (1-3) p.420 • II. Quiz#20 • III. Journal #34 pt.B -questions on Fed Film: What should the Fed do? • NOTICE: Chapter#13&14 Test Tomorrow!

  38. The Role of the Fed • Main goal of the Fed Open Market Committee…control inflation • How can the Fed control inflation? 1.) Change the interest rate 2.) Change the reserve requirement 3.) Open Market Operations - Buy or Sell securities (bonds) *buy – increases the money supply *sell – decreases the money supply

  39. Fed Video • 1.) What is the role of the Fed? • 2.) What causes inflation? • 3.) What happened to the cost of a bagel when the money supply was increased? • 4.) How does the Fed determine the money supply? • 5.) Why do people spend money when inflation hits? • 6.) What were fears of the Fed if inflation continued to rise? • 7.) What portion of the money supply is in the form of cash and coins?

  40. 8.) What was the prime rate in 1980? • 9.) What did this rate do to the housing and auto industry? • 10.) What happened to the unemployment rate when the money supply shrank? • 11.) What happened to the inflation rate? • 12.) What happened to the unemployment rate in 1984? • 13.) What role does the Federal Reserve District President play? • 14.) How has the Globalization of the economy effected the role of the Fed?

  41. Economics 2/18/11 http://mrmilewski.com • OBJECTIVE: Demonstration of Chapters#13&14 and begin examination of Monetary Policy. • I. Administrative Stuff -attendance & distribution of test • II. Chapter#13&14 Test • III. Journal #35 pt.A -Read “Profiles in Economics” p.414 -Answer questions (1-2) p.414 • IV. Journal #35 pt.B -notes on monetary policy

  42. Monetary Policy • Monetary policy – the expansion or contraction of the money supply in order to influence the cost and the availability of credit. • In English, when the Fed raises interest rates the amount of money in the economy gets smaller. • When the Fed lowers interest rates, the amount of money in the economy gets bigger. • Higher interest rates encourage people to save money. • Lower interest rates encourage people to spend and borrow money.

  43. Structure of the Fed

  44. How does the Fed influence interest rates? • Fractional reserve system – requires banks and other depository institutions to keep a certain percentage of their deposits on hand as legal reserves. • Legal reserves – consists of coins and currency held in the bank’s vault and the currency it has on deposit with the Federal Reserve. • The Fed requires that banks keep a reserve of 12% against demand deposit accounts.

  45. How Banks Operate • You deposit $100 in your savings account. • The bank MUST keep 12% of that $100 on reserve. (They must keep $12) • The bank loans out the other $88. • If the person who borrows the money puts it in a checking account, the $88 is treated as a new deposit and 12% or $10.56 of it must be set aside as a reserve. The other $77.44 can now be loaned out. • This is the multiplication of the money supply.

  46. Example of Fractional Reserve at 20% • Ch#15 sec#2 p.419

  47. Tools of Monetary Policy • If the Fed wants the money supply to grow they can do the following: • 1.) Lower the interest rate • 2.) Lower the reserve requirement • 3.) Buy securities (buy bonds) • This is known as easy money policy.

  48. Tight money policy • If the Fed wants the money supply to contract, or slow they can do the following: • 1.) Increase the interest rate • 2.) Increase the reserve requirement • 3.) Sell securities (sell bonds) • This is known as tight money policy.

  49. Tight money policy

  50. The Role of the Fed • Main goal of the Fed Open Market Committee…control inflation • How can the Fed control inflation? 1.) Change the interest rate 2.) Change the reserve requirement 3.) Open Market Operations - Buy or Sell securities (bonds) *buy – increases the money supply *sell – decreases the money supply

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