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Business, banking, and money. The Business Cycle ~ the ups and downs of the economy and the money that people have to spend is called The Business Cycle . The Business Cycle has four basic phases:. 1.
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The Business Cycle ~ the ups and downs of the economy and the money that people have to spend is called The Business Cycle.
The Business Cycle has four basic phases: 1 • In the first phase, the economy is improving—business is improving, people have jobs and are buying many goods and services;
2 1 In the second phase, economic activity has peaked—businesses are working at maximum capacity and stores are selling in record amounts;
2 3 1 • In the third phase, the economy begins to slow—people buy less, and companies cut back on production and lay off workers;
2 3 4 1 • In the fourth phase, production is at its lowest and unemployment is very high—people have less money to buy products and businesses are not hiring new workers. This is called a recession. If the recession lasts long enough, it might turn into a depression.
The longest depression that the United States ever had was The Great Depression, from 1929-1939. But eventually the business cycle usually will swing up and start all over again.
Managing the Economy Fiscal policy~ refers to the way a government taxes citizens and spends money. The government can use different fiscal policies to affect the business cycle.
For instance, to end a recession the government could: • Spend more money on public goods and services to keep businesses busy and workers employed; • Cut taxes to give consumers more money to spend on goods and services, which would keep businesses producing and workers working;
At certain points in the business cycle, inflation can become a problem. Inflation is the general rise in the price of goods and services. When the business cycle is expanding, people have more money to spend, which also means they demand more goods and services. Higher demand leads to higher prices and inflation.
The government can try to control inflation by: • Raising taxes so consumers have less money to spend; • Cutting government spending, so businesses receive less money and have to slow down their production; • Raising the interest rate, which makes it more expensive to borrow money--this means people will borrow less, and spend less.
Monetary policy~ refers to the way the government regulates to amount of money in circulation.
In the United States, money is regulated by an organization called the Federal Reserve. It is part of the Executive Branch.
The Federal Reserve: • Acts as a central bank of the U.S.; • Supervises banks and banking practices; • Issues currency printing by the Treasury Department; • Is sometimes referred to as the “banker’s bank”; • Lends money to banks; • Maintains a stable economy; • Regulates the money supply.
The Federal Reserve (sometimes called just “The Fed”) also sets the prime interest rate that all other banks use to loan money. The interest rate that the Fed charges to other banks to borrow its money is called the Discount rate.
The actions of the Federal Reserve can have a great impact on the economy of the United States. For instance, if the Fed wanted to slow down the economy and help control inflation, it could: • Increase the reserve requirement for banks (this is the amount of money a bank must hold and not loan out. If a bank is required to keep more of its money, people can’t borrow as much and spend less.)
Raise the discount rate (this would make it harder for banks to borrow from the Fed, so there would be less money for individual banks to loan to consumers.) • Sell government securities (the Fed could sell some of the government’s bonds; decreased government spending means businesses receive less from the government and the economy slows down.)
If the Fed wanted to stimulate the economy and get it going again, it could: • Lower the reserve requirement (which would allow banks to loan out more money.) • Lower the discount rate (which would make it easier for banks to borrow from the Fed) • Buy government securities (increased spending by the government means businesses receive more money from the government and increase production.)
The government also tries to protect people’s money, especially money that is deposited in banks and credit unions. A credit union is a like a bank that is owned by its members. Usually they are formed by people or businesses that work together, like a teacher’s union or one of the armed services.
To protect people from losing money that they have in banks and credit unions, like so many people did during the Great Depression, the government created the: • Federal Deposit Insurance Corporation (FDIC) to insure money people have in banks; • National Credit Union Share Insurance Fund to protect money invested in credit unions Money that is put into banks or credit unions that are members of either of these two organizations is insured by the government, and will be replaced if the bank of credit union fails.
