Chapter 13 "Economic Instability" Questions 1-14 Quiz Study Guide

Question 1

What is the difference between business cycles and business fluctuations

Answer 1

Business Cycles - the NATURAL ups and downs of an economy measured by the growth and decline of production of jobs.
Business Fluctuations - IRREGULAR ups and downs caused by UNEXPECTED disruptions.

Question 2

Explain the FOUR PHASES of a business cycle.

Answer 2

Peak (boom) - Good, high investment, high profits and wages, high spending, low unemployment, and inflation.
Recession (contraction) - Downturn, demand and consumer spending slows, output decreases, unemployment increases, inflation falls, and low/negative economic growth
Expansion (recovery) - Upturn, business invest, output increases, consumer spending rises, jobs creates, low but increasing economic growth
Depression (Trough) - Slump, bad, low investment, low profits and wages, low spending, high unemployment, low/negative economic growth

Question 3

What are some reasons that can turn expansion into a contraction? (Hint: there are 5)

Answer 3

1. External Shock - factors OUTSIDE the U.S economy (i.e. 9/11, COVID-19)
2. Loss of confidence in economy - prompts consumers to stop buying and move into defensive mode
3. Stock Market Crash - effects ENTIRE economy
4. Manufacturing orders slow down - good predictor
5. Deflation - PRICES FALLING overtime have a worse effect on economy than inflation - reduces values of goods and services sold on market

Question 4

What was the worst downturn in the economy in the 20th century?

Answer 4

The Great Depression (1929-1939)

Question 5

Explain the economy DURING THE GREAT DEPRESSION.

Answer 5

• “Black Tuesday” AKA Stock Market Crash which happened October 29, 1929.
• 1933 - LOWEST POINT, consumer spending dropped causing steep decline in output and employment as companies laid of workers.
• Unemployment rose nearly 800%
• Half the banks failed (FDIC didn’t exist.
• PROCLAMATION 2039 - signed by FDR in his first 36 hours in office that shut down all banks for a whole week. “Bank Holiday”

Question 6

Who was president at the beginning of the Great Depression?

Answer 6

Herbert Hoover

Question 7

Who was president during most the Great Depression?

Answer 7

Franklin D. Roosevelt

Question 8

How long did the Great Depression last?

Answer 8

10 years (1929-1939)

Question 9

What was the major event that ended the Great Depression?

Answer 9

World War 2

Question 10

There were a number of reforms established to prevent another disaster to protect people. What were they? (Hint: there are 5 and all were created by FDR)

Answer 10

1. Social Security - Signed into law by FDR on AUGUST 14th, 1935. Designed to pay retired workers 65 or older. Lifetime money
2. Fair Labor Standards Act of 1938 (FLSA) - Started minimum wage at .25 cents/hour, and it has been raised 22 separate times (most recent in July 2009 $7.25)
3. Unemployment programs (branches with Social Security Bill) - relieves stress after being unemployed. Unemployed insurance - designed to compensate only employable persons who are through NO FAULT OF THEIR OWN.
4. Securities and Exchange Commission (SEC) - Signed 1935 to regulate new companies that were looking for money from investors - make stock ownership safer
5. Federal Deposit Insurance Corporation (FDIC) - Signed 1933 to provide safety at banks and provided modest bank insurance to depositors.E

Question 11

Explain how the economy has been since World War II? When did WWII end?

Answer 11

(WWII ended 1945 when Truman was president)
- Shorter recessions and longer expansions
- average length of a recession is about 10 months
- average length of expansion is about 54 months (4+ years)
Post WW2 - greatest military + economic power (USSR)

Question 12

What was the Great Recession of 2008-2009?

Answer 12

• longest and deepest recession SINCE the Great Depression.
• % of unemployment doubled
• 8.2 million people lost their jobs
• foreclosures and repossessions

Question 13

What is the difference between inflation and deflation?

Answer 13

Inflation - rise in prices
Deflation - decline in prices

Question 14

Describe 3 types of inflation.

Answer 14

1. Creeping Inflation - 3% or less a year in rise of prices
2. Galloping Inflation - prices rise 10% or more in a year
3. Hyperinflation - prices rise more than 50% a month

Question 15

What are the FOUR EXPLANATIONS FOR THE CAUSES OF INFLATION?

Answer 15

1. Demand-pull theory - strong consumer demand drives inflation - limited # of goods in market and large demand, prices rise
2. Cost-push theory - overall price levels go up because of increase in cost of wages, raw materials, and anything else to make a product
3. Wage-price spiral - self-perpetuating spiral of wages and prices
4. Excessive money growth - money supply grows FASTER than goods causing increased spending

Question 16

What are the THREE CONSEQUENCES OF INFLATION?

Answer 16

1. Reduced purchasing power - dollar buys less whenever prices rise and money loses value over time - hurts retired people and ones with fixed incomes
2. Changed spending habits - inflation changes how we buy things
3. Effected creditors/debtors - during inflation, creditors, people who lend money, are hurt more than debtors, who owe money.