Chapter 13 “Economic Instability” Test Review Flashcards
What is the difference between a business cycle and business fluctuations?
Business Cycle - the NATURAL ups and downs of an economy measured by the growth and decline of production of jobs.
Business Fluctuations - IRREGULAR ups and downs caused by UNEXPECTED disruptions
Explain the FOUR PHASES of a business cycle
Peak (boom) - Good, high investment, high profits and wages, high spending, low unemployment, and inflation
Recession (contraction) - Downturn, demand and consumer spending slows, output decreases, unemployment increases, inflation falls, and low/negative economic growth
Expansion (recovery) - Upturn, business invest, output increases, consumer spending rises, jobs created, low but increasing economic growth
Depression (trough) - slump, bad, low investment, low profits and wages, low spending, high unemployment, low/negative economic growth
What are some reasons that can turn expansion into a contraction? (Hint: there are 5)
- External shock - factors OUTSIDE the U.S economy (i.e. 9/11, COVID)
- Loss of confidence in economy - prompts consumers to stop buying and move into defensive mode
- Stock market crash - effects ENTIRE economy
- Manufacturing orders slow down - good predictors
- Deflation - PRICES FALLING overtime have a worse effect on economy than inflation - reduces value of goods and services sold on market
What was the worst downturn in the economy in the 20th century?
The Great Depression
Explain the economy DURING The Great Depression.
- “Black Tuesday” AKA Stock Market Crash, October 29, 1929
- 1933 - LOWEST POINT, consumer spending dropped causing steep decline in output and employment as companies laid off workers
- Unemployment rose nearly 800%
- Half the banks failed (FDIC didn’t exist)
- PROCLAMATION 2039 - signed by FDR in his first 36 hours in office that shut down banks for a whole week. “Bank Holiday”
Who was the president at the beginning of the Great Depression?
Herbert Hoover
Who was the president during most of the Great Depression?
Franklin D. Roosevelt
How long did the Great Depression last?
10 years (1929-1939)
What was the major event that ended the Great Depression?
World War 2 (Ended 1945)
What were the 5 reforms FDR signed?
- Social Security - Signed into law by FDR on August 14th, 1935. Designed to pay retired workers ages 65 or older. Lifetime money
- Fair Labor Standards Act (1938) - Started minimum wage which at the time was $.25/ hr and it has been raised 22 separate time (most recent: July 2009 $7.25)
- Unemployment programs - relieves stress from unemployed. Unemployment insurance designed to compensate only employable persons who are through NO FAULT OF THEIR OWN
- Securities and Exchange Commission (SEC) - signed1935 to regulate new companies that were looking for money from investors - make stock ownership safer
- Federal Deposit Insurance Corporation (FDIC) - signed 1933 to provide safety at banks and provided modest bank insurance to depositors
Explain how the economy has been since WW2?
- Shorter recessions and longer expansions
- Average length of a recession is about 10 months
- Average length of expansion is about 54 months (4+ years)
Post WW2 - greatest military + economic power (USSR)
What was the Great Recession? How long did it last?
- longest and deepest recession SINCE Great Depression
- % of unemployed doubled
- 8.2 million people lost their jobs
- foreclosures and repossessions
What is the difference between inflation and deflation?
Inflation - rise in prices
Deflation - decline in prices
Describe the 3 types of inflation.
- Creeping inflation - 3% or less
- Galloping inflation - 10% or more
- Hyperinflation - 50% or more
What are the FOUR EXPLANATIONS FOR THE CAUSES OF INFLATION?
- Demand-pull theory - strong consumer demand drives inflation - limited # of goods in market and large demand, prices rise
- Cost-push theory - overall price levels go up because of increase in cost of wages, raw materials, and anything else to make a product
- Wage-price spiral - self-perpetuating spiral of wages and prices
- Excessive money growth - money supply grows FASTER than goods causing increased spending
