Vicious Circle

Question 1

When businesses lose money and inventories increase, what do businesses do?

Answer 1

slow down production and look for ways to save money

Question 2

When businesses slow production and look for ways to cut production, what does that cause the businesses to do?

Answer 2

cut or freeze wages and/or fire people

Question 3

When businesses cut or freeze wages and or fire people, what are 3 ways this affects workers?

Answer 3

1. workers make less money
2. workers are afraid of being fired
3. some workers actually are fired

Question 4

When workers make less money, are afraid of being fired, or actually are fired, what are 2 ways this affects their willingness and ability to spend money?

Answer 4

1. some people don’t have money to spend

2. some people lose confidence in the economy and fear they will not have money in the future

Question 5

When people don’t have money to spend or fear they won’t have money in the future, what do they do?

Answer 5

cut back on spending

Question 6

When people cut back on spending, how does that affect businesses

Answer 6

Businesses can’t sell everything so they lose money and inventories (of products) increase

Question 7

Why is it so hard to get out of the vicious circle?

Answer 7

Once it starts, it just keeps repeating because it is a circle, and every time it repeats things get worse

Question 8

What has to happen to get out of the vicious circle?

Answer 8

Someone has to start spending money

Question 9

Why don’t people or businesses do the things that would end the vicious circle?

Answer 9

In the short term it is not in their individual best interest to do so, even though it would help the economy as a whole.