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Understanding Business Cycles: From GDP Trends to Federal Reserve Policies

This comprehensive overview explores the intricacies of business cycles, highlighting key concepts such as Real GDP peaks and troughs, the definitions of expansion and recession, and theories behind economic fluctuations. It also delves into unemployment rates, types of unemployment, and inflation dynamics, including demand-pull and cost-push inflation. The role of the Federal Reserve, including its major functions and monetary policies, is examined to provide insight into how these factors influence economic stability and growth.

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Understanding Business Cycles: From GDP Trends to Federal Reserve Policies

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Presentation Transcript

  1. Business Cycle • Real GDP • Peaks • Real GDP stops increasing • Troughs • Real GDP stops decreasing • Expansion/Recovery • Recession • Must be 2 quarters negative

  2. Business Cycle Theories • Innovation • Psychological • Inventory • Monetary • Underconsumption • Exogenous • External Shock

  3. Predicting the Business Cycle • Unemployment • Consumer Goods • Durable Goods • Housing • CPI/PPI • Money Supply

  4. Unemployment • People available for work who made a specific effort to find a job during the past month and who, during the most recent survey worked less than one hour for pay.

  5. Unemployment Rate • Number of unemployed/Labor Force • Under reported • Discouraged workers

  6. Types of Unemployment • Frictional • Structural • Cyclical • Seasonal

  7. Full Employment • 4-5% • Why?

  8. Inflation • Rise in general price level

  9. Deflation • Decrease in general price level

  10. Disinflation • Rate of inflation decreasing

  11. Demand Pull Inflation • Excessive demand for goods and services

  12. Cost Push Inflation • Wage Price Spiral • Wage increases lead to higher prices • Profit-push Inflation • Large corporations keep prices high • Supply Side Shock • Oil

  13. Consumer Price Index (CPI) • Increase of price on the consumer level

  14. Producer Price Index (PPI) • Increase of price at the producer level

  15. Market Basket • Check of recipes month to month

  16. Types of Inflation • Creeping • Galloping • Hyper

  17. Misery Index • Combines inflation rate and unemployment rate. • Not a useful economic measure, more of a social measure

  18. The Federal Reserve Federal Reserve Act of 1913 7 Members of Board of Governors 14 year terms Election every 2 years Chairman of the Board 4 year term 12 District banks Board of Governors in Washington DC National bank, privately owned

  19. Districts • http://upload.wikimedia.org/wikipedia/commons/thumb/3/3e/Federal_Reserve_Districts_Map.svg/800px-Federal_Reserve_Districts_Map.svg.png

  20. The Fed’s Main Jobs • Conduct Monetary Policy • Lender of last resort • Issue Currency • Provide banking services to the US Gov’t • Supervise and regulate our financial institutions

  21. Legal Reserve Requirements • Required reserves • Actual reserves • Excess reserves

  22. Reserves • Primary • Secondary

  23. Federal Open Market Committee • People who conduct open market operations • Board of governors (7) • President of NY Fed District Bank • Presidents of 4 other Fed District Banks (rotate)

  24. The Fed’s Policies • Tight Policy • Loose Policy

  25. The Fed’s Tools • Open Market Operations • Reserve Requirement • Discount Rate

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