Economics 11/7/11 http://mrmilewski.com

1. Economics 11/7/11http://mrmilewski.com • NO SCHOOL: Professional Development Day. Happy Eid al Adha to all the people.

2. Economics 11/8/11http://mrmilewski.com • NO SCHOOL: Professional Development Day. • Election Day

3. Economics 11/9/11 http://mrmilewski.com • OBJECTIVE: Demonstration of Chapter#12 and begin examination of the business cycle. MCSS E-2.1.5 • I. Administrative Stuff -attendance & distribution of test • II. Chapter#12 Test • III. Journal #34 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 #34 pt.B -notes on the business cycle

4. http://www.slate.com/blogs/the_reckoning/2011/11/07/welcome_to_the_reckoning_a_blog_about_american_power_.htmlhttp://www.slate.com/blogs/the_reckoning/2011/11/07/welcome_to_the_reckoning_a_blog_about_american_power_.html

5. This week • Chapter#13 section#1 • Chapter#14 section#1 • Chapter#14 section#3 • Chapter#13&14 Test is Tuesday!

6. 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

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

8. 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.

9. 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)

10. CPI 2002-2011

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

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

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

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

15. 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.

16. 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!

17. 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

18. Economics 11/10/11 http://mrmilewski.com • OBJECTIVE: Examine of the business cycle. MCSS E-2.1.4 • I. Journal #35 pt.A -Questions on Econ U.S.A. episode#3 • II. Quiz#19 • III. Return of Chapter#12 Test • IV. Journal #35 pt.B -notes on the business cycle

19. 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?

20. This week • Chapter#13 section#1 • Chapter#14 section#1 • Chapter#14 section#3 • Chapter#13&14 Test is Tuesday!

21. Figure 13.3Circular Flow of Economic Activity

22. 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

23. 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

24. 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

25. 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

26. 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

27. Economics 11/11/11 http://mrmilewski.com • OBJECTIVE: Examine of the effects of monetary policy on the business cycle & types of inflation. MCSS E-2.1.7 • I. Journal #36 pt.A -Read “Business Week Newsclip” p.362 -Answer questions (1-2) p.362 • II. Journal #36 pt.B -notes on the business cycle • III. Journal #36 pt.C -notes on the Commanding Heights (episode#2 day#2)

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