Transcript UNIT C ECONOMIC FOUNDATIONS AND FINANCING 5.01

UNIT C
ECONOMIC FOUNDATIONS
AND FINANCING
5.01 Exemplify the stages
in a business cycle.
1
Phases of the business cycle
Business cycle: The movement
of an economy through
recurring phases.
Expansion
Recession
Depression
Trough
Recovery
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Expansion
• Prosperous economy
• Low unemployment
• Increase in output of goods and
services
• High consumer spending
• A good time for new businesses
to start up or existing businesses
to expand
• Expansion continues until it
reaches a peak, at which time a
recession then begins.
3
Recession
• A period of economic slowdown
that lasts for at least six months
• Reduction in workforce
• Reduced consumer spending
• Fewer goods and services being
produced
• Plans for business expansion are
put on hold.
• Businesses spend little money on
research and development.
• Ends when the economy reaches
its trough
4
Depression
• Period of prolonged recession
• Does not always follow a
recession
• Very high unemployment
• Many businesses are forced to
shut down.
• Very low consumer spending
• Very little production of goods
and services
• Widespread poverty is the result
of a depression.
5
Trough
• Low point in the
business cycle in
which the economy
transitions from
recession to
recovery
• Economy stops
slowing down
• Indicates that a
recovery is near
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Recovery
• A period of renewed economic
growth following a recession or
depression
• Economic expansion begins
again.
• Business begins to increase.
• Unemployed people begin to find
jobs.
• Demand for goods and services
increases.
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Factors affecting business
cycles
• Responses of
businesses to
current economic
conditions
• Consumer outlook
and the resulting
behaviors
• External factors
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Responses of businesses to
current economic conditions
• Expanding operations during periods
of recovery or expansion
–
–
–
–
Investing in new properties
Purchasing new equipment
Increasing inventories
Hiring additional employees
• Limiting operations during periods of
recession
– Laying off workers
– Decreasing inventories to match the
decreased demand for goods and services
9
Consumer outlook and the
resulting behaviors
• During a recession, consumers fear the
loss of jobs and decreases in wages.
– Loss of confidence in the economy
– Reduction in consumer spending
• During a period of economic prosperity
and recovery, consumers are
optimistic.
– Increased consumer spending for material
goods and luxury items
– Increased production of goods (by
businesses) to meet consumer demand
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External factors affecting
business cycles
• Political changes
– People
– Policies
• Seasonal, climatic,
and weather changes
– Holidays
– Major weather events
or acts of nature
• International
relations
– Wars
– International trade 11
Government’s influence over
business cycles
• Taxes may be raised
when the
government needs
additional money to
run programs.
• Businesses and
consumers have less
money to spend
when they are
paying higher taxes.
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Government’s influence over
business cycles (cont.)
• In order to boost the
economy, the government
may cut taxes, reduce
interest rates, or establish
federally funded
programs.
• The Federal Reserve can
lower interest rates in
order to encourage
spending by businesses
and consumers.
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Government’s influence over
business cycles (cont.)
• If inflation becomes a
problem, the government
may increase interest rates
in order to discourage
consumers from buying on
credit.
• State and local governments
may initiate tax-free
shopping days in order to
increase consumer
spending, thus giving a
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boost to the economy.