Business Cycle – Stocks(Ch. 23, Section 2)

The Business Cycle

  • The Business Cycle (AKA The Economic Rollercoaster)
  • The ups & downs of the economy
  • Alternating periods of growth & decline
  • 4 Phases
  • Expansion (Also known as Prosperity or Recovery)
  • Economy is improving
  • Businesses produce more needing more employees
  • Higher employment means higher wages
  • Higher wages mean higher consumption
  • Higher consumption means more production
  • Boom
  • Economic activity is at its peak
  • Peak – the highest point of the boom
  • Businesses are working at full capacity
  • Law of Diminishing Returns – as a business adds more resources to production profits will rise until a point where more resources begin reducing profits
  1. Decline(Contraction)
  • The economy is slowing down
  • Production is cut down
  • Workers are laid off
  • Recession
  • Occurs when Real GDP goes down over 6 months
  • Real GDP – shows economy’s production after the distortions of price increases have been removed
  • Eliminates impression that output has gone up when only prices have gone up
  • Lowest period of production
  • Unemployment is high
  • People do not buy as much
  • Trough: lowest point of a recession
  • Depression: a severe recession

Unemployment

  • Unemployment Rate
  • Percentage of labor force without jobs but actively looking
  • Unemployment reduces living standards, disrupts families & causes a loss of self respect
  • Reaches its highest during a recession
  • Types of Unemployment
  • Cyclical – associated with the ups & downs of the economy
  • Structural – changes in the economy based on technology
  • Seasonal – based on the weather
  • Frictional – based on people being terminated or looking for new jobs

The Great Depression

  • The Great Depression
  • Began in 1929 with a stock market crash
  • Black Tuesday, October 29, 1929
  • Many saw it as the end of capitalism
  • Bank runs – people tried to get all their cash out of banks, banks ran out of money
  • Herbert Hoover was president
  • Hoovervilles – were names of shanties (homeless towns) during the Depression
  • The New Deal
  • Franklin D. Roosevelt’s plan to end the depression
  • First 100 Days
  • Restored faith in banks – Bank holiday
  • Fireside Chats
  • Financial Reform
  • Glass-Steagall Act – 1933
  • Banks could not invest in the stock market
  • Repealed in 1980. Some believe the reason we are in this financial mess today. (move up)
  • FDIC created
  • Guarantees usually $100,000, but from Oct. 3, 2008 to December 31, 2009 up to $250,000
  • Federal Securities Act – 1933
  • SEC created as a result of this act
  • No stock market fraud
  • Splits the nation’s economy
  • Fiscal policy – the Government
  • Monetary policy – the Federal Reserve

Measuring the Economy

  • Inflation
  • Decline in the value of money
  • Purchasing power – amount the dollar can buy
  • Measured by the Consumer Price Index & Implicit GDP price deflator
  • Consumer Price Index (CPI)
  • Samples prices for 400 products commonly used
  • Change in price over time of goods & services the average household uses
  • Base year – 1982-1984 – the average of these years is compared to each year
  • Implicit GDP Price Deflator
  • Takes inflation out of GDP for year to year comparisons
  • Base year – 1987
  • GDP Categories
  • Consumer goods – bought by consumers for final use
  • Business (Capital) goods – bought to be used by a business to produce other goods
  • Government goods – anything bought by the federal, state and local governments
  • Net Exports
  • The difference in what the nation buys & sells with other countries
  • Export – anything sold to another country
  • Import – anything bought from other countries

Stocks

  • Corporations sell stock to raise financial capital
  • People buy stock to make money
  • Dividends – share of a corporation’s profits
  • Capital Gain – when stock is sold for more than it originally cost – Rule: Buy low, sell high
  • Stock Indexes
  • Statistical measures that track stock prices over time
  • The ticker
  • Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P)
  • Stock Exchanges
  • Stock market – where stock is bought & sold
  • Ex: NYSE – largest & most prestigious
  • Others: American Stock Exchange, Chicago Mercantile Exchange, Electronic – NASDAQ
  • Changes in stock prices are based on market forces of supply & demand
  • Bull Market
  • Investors expect growth, profits high & unemployment low
  • Prices tend to rise
  • Bear Market
  • Investors are pessimistic, profits drop & unemployment rises
  • Prices fall
  • Changes to Stock Prices
  • Change in profits
  • Rumors (externalities)
  • News
  • Stockbroker – person who buys & sells stock

Business Cycle – Stocks (Ch. 23, Section 2)

The Business Cycle

  • The Business Cycle (AKA The Economic ______)
  • The ups & downs of the economy
  • ______
  • 4 Phases

1. ______(Also known as Prosperity or ______)

  • Economy is ______
  • Businesses produce more needing more employees
  • ______
  • Higher wages mean higher consumption
  • Higher ______means more production

2. ______

  • Economic activity is at its peak
  • ______
  • Businesses are working at ______
  • ______– as a business adds more resources to production profits will rise until a point where more resources begin ______

3. ______

  • The economy is ______
  • Production is ______
  • Workers are laid off

4. ______

  • ______
  • Real GDP – shows economy’s production after the ______
  • Eliminates impression that output has gone up when only prices have gone up
  • ______
  • Unemployment is ______
  • ______
  • ______: lowest point of a recession
  • Depression: ______

Unemployment

  • Unemployment Rate
  • ______
  • Unemployment reduces ______, disrupts families & causes a loss of self respect
  • Reaches its highest during a recession
  • Types of Unemployment
  • ______– associated with the ups & downs of the economy
  • Structural – ______
  • Seasonal – ______
  • ______– based on people being terminated or looking for new jobs

The Great Depression

  • The Great Depression
  • ______
  • ______, October 29, 1929
  • Many saw it as the end of capitalism
  • ______– people tried to get all their cash out of banks, banks ran out of money
  • Herbert Hoover was president
  • ______– were names of shanties (homeless towns) during the Depression
  • ______
  • ______plan to end the depression
  • ______
  • Restored faith in banks – ______
  • Fireside Chats
  • Financial Reform
  • Glass-Steagall Act – 1933
  • ______
  • Repealed in 1980. Some believe the reason we are in this financial mess today. (move up)
  • ______
  • Guarantees usually $100,000, but from Oct. 3, 2008 to December 31, 2009 up to $250,000
  • ______
  • SEC created as a result of this act
  • No stock market fraud
  • Splits the nation’s economy
  • Fiscal policy – ______
  • ______policy – ______

Measuring the Economy

  • Inflation
  • ______
  • ______– amount the dollar can buy
  • Measured by the Consumer Price Index & Implicit GDP price deflator
  • ______(CPI)
  • Samples prices for 400 products commonly used
  • Change in price over time of goods & services the average household uses
  • ______– 1982-1984 – ______
  • Implicit GDP Price Deflator
  • Takes ______out of GDP for year to year comparisons -Base year – 1987
  • GDP Categories
  • Consumer goods – ______
  • Business (Capital) goods – bought to be used by a business to produce other goods
  • ______– anything bought by the federal, state and local governments
  • Net Exports
  • The difference in what the ______
  • Export – ______
  • ______– anything bought from other countries

Stocks

  • ______
  • People buy stock to make money
  • Dividends – ______
  • ______– when stock is sold for more than it originally cost – Rule: ______
  • ______
  • Statistical measures that track stock prices over time
  • ______
  • Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P)
  • Stock Exchanges
  • Stock market – where ______
  • Ex: ______– largest & most prestigious
  • Others: American Stock Exchange, Chicago Mercantile Exchange, Electronic – NASDAQ
  • Changes in stock prices are based on market forces of ______
  • ______Market
  • Investors expect ______
  • Prices tend to rise
  • ______Market
  • Investors are pessimistic, profits drop & ______
  • ______
  • Changes to Stock Prices
  • ______
  • Rumors (externalities)
  • News
  • ______– person who buys & sells stock