economic instability chapter 14. goals & objectives 1. phases of the business cycle. 2. identify...
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Economic InstabilityEconomic Instability
Chapter 14Chapter 14
Goals & ObjectivesGoals & Objectives
1.1. Phases of the business cycle.Phases of the business cycle.
2.2. Identify 5 causes of the business Identify 5 causes of the business cycle.cycle.
3.3. Unemployment & 5 types.Unemployment & 5 types.
4.4. How inflation is measured.How inflation is measured.
5.5. 5 causes & consequences of inflation.5 causes & consequences of inflation.
6.6. Measuring the distribution of income.Measuring the distribution of income.
7.7. Antipoverty programs.Antipoverty programs.
Business Cycles & FluctuationsBusiness Cycles & Fluctuations
Phases: Phases: 1. 1. recessionrecession: GDP declines for two : GDP declines for two quarters in a rowquarters in a row
2. 2. peakpeak: point where GDP stops : point where GDP stops going up.going up.
3. 3. troughtrough: turnaround point where : turnaround point where GDP stops going down.GDP stops going down.
4. 4. expansionexpansion: period of : period of recessionary recoveryrecessionary recovery
5. 5. depressiondepression: high unemployment, : high unemployment, work shortages, supply shortageswork shortages, supply shortages
Business Ups & DownsBusiness Ups & Downs
Great DepressionGreat Depression
October 29, 1929: October 29, 1929: Black TuesdayBlack Tuesday Why? Causes of the Great Why? Causes of the Great DepressionDepression
1.1. Easy Credit: Easy Credit: Federal ReserveFederal Reserve
2.2. Global economyGlobal economy: interdependent : interdependent banking & foreign loan defaults.banking & foreign loan defaults.
3.3. Overproduction: Overproduction: Technology & Technology & increased labor productivityincreased labor productivity
4.4. Speculation: Speculation: Buying on marginBuying on margin
19131913: Federal Reserve Controls Money & : Federal Reserve Controls Money & Banking=Banking=1616 years later: years later: Great DepressionGreat Depression
Causes of the Business CycleCauses of the Business Cycle
1.1. Capital ExpendituresCapital Expenditures: new ventures, : new ventures, capital goods technology, new markets.capital goods technology, new markets.
2.2. Inventory AdjustmentsInventory Adjustments: JIC theory (long : JIC theory (long run) vs. JIT theory (short run).run) vs. JIT theory (short run).
3.3. Innovation and limitationInnovation and limitation: new products, : new products, new technology, new process. (social new technology, new process. (social media, e-commerce).media, e-commerce).
4.4. Monetary FactorsMonetary Factors: Credit & loan policies : Credit & loan policies of the Federal Reserve.of the Federal Reserve.
5.5. External ShocksExternal Shocks: Oil prices, wars, free : Oil prices, wars, free trade agreements, international boycotts & trade agreements, international boycotts & strikes.strikes.
Unemployment
Unemployed: people out of work who made a specific effort to find a job during the past month: Employment Office
Limitations of Unemployment Rate: does not count people who are not looking for work or people with part-time jobs.
Unemployment & Education
Unemployment & Underemployment Rates
Kinds of UnemploymentKinds of Unemployment
1. 1. Frictional UnemploymentFrictional Unemployment: workers : workers between jobs.between jobs.
2. 2. Structural UnemploymentStructural Unemployment: changes in : changes in technology. Military Base closures.technology. Military Base closures.
3. 3. Cyclical UnemploymentCyclical Unemployment: recessionary : recessionary periods: automotive market, housing periods: automotive market, housing marketmarket
Kinds of UnemploymentKinds of Unemployment
4. 4. Seasonal UnemploymentSeasonal Unemployment: Life-guarding, : Life-guarding, snow skiing, summer school teachers.snow skiing, summer school teachers.
5. 5. Technological UnemploymentTechnological Unemployment: : automation that replaces less skilled automation that replaces less skilled workers.workers.
Concept of Full EmploymentConcept of Full Employment
Does not mean 0 unemployment rate. Does not mean 0 unemployment rate. Opinions vary: Most economists consider Opinions vary: Most economists consider
4.5% the margin of full employment.4.5% the margin of full employment.20002000: 3.9%: 3.9%
Inflation
Measuring Inflation: 1. deflation: decrease in the general price level.
Degrees of Inflation: A. creeping inflation: 1-3 % a year B. galloping inflation: 100-300 % a year
C. Hyperinflation: 500% or more per year
Supply-Side Economics 1980
Comparison Inflation Rates
Causes of Inflation
1. Demand-Pull Theory: government deficit/spending causes inflation.
2. Rising Input Costs: labor and wages, Unions, taxes, gov’t regulations/fees/fines.
3. Collusion: OPEC, large corporations 4. Excessive Monetary Growth: Federal
Reserve; Quantitative Easing (Q3)
Demand-Pull Inflation
Wage-Price Spiral: Cost-Push Inflation
Consequences of Inflation
1. The dollar buys less. Devaluation: Hard on fixed incomes, minimum wage earners.
2. Can cause people to change their spending habits: Decrease in spending.
3. Increases speculation: Rising home prices in 90’s
4. Alters the distribution of income. Lenders hurt more than borrowers. Gov’t Bailouts:
Poverty and the Poverty and the Distribution of IncomeDistribution of Income
•Reasons for Reasons for Income InequalityIncome Inequality: : – 1. Educational levels1. Educational levels– 2. Wealth: Savings vs. Spending2. Wealth: Savings vs. Spending– 3. Discrimination: Jim Crow & 3. Discrimination: Jim Crow & Affirmative ActionAffirmative Action
– 4. Ability: Talents, productivity4. Ability: Talents, productivity– 5. Monopoly Power: Cooperatives, 5. Monopoly Power: Cooperatives, SubsidiesSubsidies
Government Monopolies & Government Monopolies & RegulationsRegulations
Lower Education = Poverty Rate Lower Education = Poverty Rate IncreaseIncrease
PovertyPoverty
15 % of Americans in poverty; 46 15 % of Americans in poverty; 46 million Americans. Median Income: million Americans. Median Income: $50,000 year$50,000 year
The The Growing Income Gap: Growing Income Gap: 1. Industry to Service jobs1. Industry to Service jobs 2. Diminishing Educational Standards2. Diminishing Educational Standards 3. Declining Unionism3. Declining Unionism 4. Divorce, Single-parent families.4. Divorce, Single-parent families.
War on Poverty RatesWar on Poverty Rates
Poverty by CountyPoverty by County
Anti-poverty ProgramsAnti-poverty Programs
• WelfareWelfare--- Public & Private --- Public & Private assistance based upon financial need.assistance based upon financial need.
1.1. Income AssistanceIncome Assistance: TANF vs. AFDC, SSI.: TANF vs. AFDC, SSI.
2.2. General AssistanceGeneral Assistance: Food Stamps, : Food Stamps, Medicaid, Obama-care (Affordable Care Medicaid, Obama-care (Affordable Care Act).Act).
3.3.Social Service ProgramsSocial Service Programs: Foster care, : Foster care, child welfare, day-care, WIC.child welfare, day-care, WIC.
4.4.Tax CreditsTax Credits: EITC or redistributed cash : EITC or redistributed cash to low income workers; to low income workers; Negative Income Tax Negative Income Tax CreditCredit..
Entitlement Spending Entitlement Spending 65%65%
War on Poverty cost to War on Poverty cost to taxpayerstaxpayers
Anti-Poverty ProgramsAnti-Poverty Programs
5. 5. Enterprise ZonesEnterprise Zones: areas where : areas where companies can locate to avoid companies can locate to avoid federal, state & local taxes with federal, state & local taxes with limited operating restrictions. limited operating restrictions.
6. 6. Workfare ProgramsWorkfare Programs: exchange some : exchange some labor for government benefits. labor for government benefits.
7. 7. Negative Income Tax CreditNegative Income Tax Credit: cash : cash payments to “certain” groups below payments to “certain” groups below the poverty line. the poverty line. Demand-Pull Demand-Pull InflationInflation..
Growth of Entitlement Growth of Entitlement SpendingSpending
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