SECTION 6.1 SECTION 6.2 SECTION 6 - Weeblyolchsconsumered.weebly.com/uploads/6/8/8/8/6888548/chap06_1.pdfSECTION 6.1 Economic Ups and Downs Throughout U.S. history, there have been

SECTION 6.1Economic Upsand DownsSECTION 6.2 Deficits and DebtSECTION 6.3 Stabilizing theEconomy

• As you read this chapter, create an outline using thecolored headings.

• Write a question for eachheading to help guide yourreading.

• Write the answer to eachquestion as you read thechapter.

• Ask your teacher to help withanswers you cannot find inthe text.

S E C T I O N 6 . 1

Economic Upsand Downs

Throughout U.S. history, there havebeen periods of wealth and periods ofwant. The ups and downs of the econ-omy have a major impact on the stan-dard of living and the quality of peo-ple’s lives.

THE BUSINESS CYCLEDid you know that you’ve lived through an unparalleled

period in U.S. history? The decade between 1991 and 2001was the longest uninterrupted period of economic growthin the United States. During this time, the great majority ofpeople who wanted to work were able to find jobs. Thestock market soared to all-time highs. Despite increasedprosperity, prices for most goods and services did notincrease significantly.

Just think how different your life may have been if youwere living in the 1930s. During that decade, the economywent into a severe decline. Factories and businesses closeddown. Many Americans couldn’t find jobs. Many werehomeless and hungry.

The ups and downs of the economy are called businesscycles. Many economists believe that these fluctuations fol-low a pattern—peak, contraction, trough, and expansion—as illustrated in Figure 6-1 on the next page.

155

ObjectivesAfter studying this section, youshould be able to:• Describe the phases of the busi-

ness cycle.• Analyze the effects of economic

conditions on consumers.• Discuss factors that affect the

state of the economy.• Explain measurements used to

gauge the state of the economy.

Key Termsbusiness cyclesrecessiondepressioninflationinteresteconomic indicatorsgross domestic productconsumer price index

156 • CHAPTER 6 The Health of the Economy

RecessionA recession is a period of significant

decline in the economy. It usually lasts sixmonths to a year. During a recession, the econ-omy produces more than people can con-sume. Business profits go down, so businesses

ECONOMIC EXTREMESMild ups and downs in the economy are

to be expected, and they don’t cause seriousproblems. More extreme fluctuations, how-ever, can cause hardships for businesses andconsumers.

The Business Cycle

The business cycle has four phases. The length of time of each cycle is irregular.

6-1 Business cycles are not as regular as shown in this illustration, but

the peaks and troughs can seem like a roller-coaster ride. What can you do

to prepare for these economic ups and downs?

During a contraction, business activity slows down. If the contraction lasts long enoughand is deep enough, the economy goes into a recession.

At the lowest point in the cycle, business activity levels off.

The economy begins to recover. People spend more money and open more businesses,demand brings more production of goods and services, and employment rises.

A period of prosperity marks the highest point of the cycle. Eventually, however, acontraction occurs and the cycle starts over again.

Contraction

Trough

Expansion

Peak

Section 6.1 Economic Ups and Downs • 157

cut back on production and lay off workers.Since laid-off workers don’t have paychecks,consumers cut back on their spending.Decreased demand causes business profits togo down even more, and the cycle continues.

Recessions have been a recurrent problemfor the U.S. economy. The 1980s started outwith a recession that turned into the mostserious economic slowdown since WorldWar II. Before the boom of the 1990s, thedecade began with a mild recession. Anotherbegan in March of 2001.

DepressionDuring a recession, the economy is in a

downward spiral. If the negative factors arestrong, they can lead to a depression—amajor economic slowdown, longer lastingand more serious than a recession. During a

depression, demand decreases sharply, pricesplummet, many businesses fail, and unem-ployment soars.

The Great Depression dominated theworld economy in the 1930s. See Figure 6-2.The economic decline began in August 1929.In late October of that year, the stock marketcrashed. However, many economists believethat the seriousness of the depression wasdue not to the crash itself, but to poor policydecisions by the government. The depressionlasted until the advent of World War II.Controls are now in place to prevent somefactors that led to the Great Depression.

InflationYou might think that a growing economy

is always good news. However, too-rapidgrowth during an economic expansion can

lead to inflation. Inflation is a general,prolonged rise in the prices of goodsand services. It doesn’t necessarilymean that all prices rise, but theaverage price of goods and servicesgoes up.

6-2

During the Great Depression, one out

of every four people in the workforce

couldn’t find a job. What types of

consumer and management skills do

you think Depression-era families

needed?


money over a period of time. Consumers earninterest when they deposit money in a savingsaccount; they pay interest when they borrowmoney. If the rate of inflation is 4%, money ina savings account that earns only 3% interestis losing purchasing power. On the otherhand, inflation can benefit someone who hasborrowed money at a fixed interest rate that islower than the rate of inflation.

FACTORS AFFECTINGUPS AND DOWNS

Some economists believe that economicups and downs are an unavoidable part of amarket economy. However, after studyingbusiness cycles over long periods, econo-mists have identified many factors externalto the economy that seem to trigger the upsand downs. They include:

Inflation affects consumers by reducingtheir purchasing power. When prices risesharply, your dollar buys fewer goods andservices than before. For example, supposeyour employer gives you a 4% increase inpay, but the inflation rate—the rise in theaverage price of goods and services—is 6%.Even though your pay went up, you actuallyexperienced a 2% drop in purchasing power.See Figure 6-3.

Inflation also affects consumers who bor-row, lend, or invest money. They need to con-sider how inflation relates to interest, the feepaid for the opportunity to use someone else’s

6-3

Inflation is especially hard on

those with fixed incomes, such

as many retired people. Their

income stays the same over

time, but each year it buys less

and less.


• Consumer confidence. The economyis affected by psychological factors. If peo-ple anticipate economic prosperity, con-sumers may increase their spending andbusinesses may hire new workers. Thisbehavior makes prosperity more likely tohappen. If Americans feel gloomy aboutthe future, they will cut back spendingand help bring about recession.

• Technological innovation. Some busi-ness cycles were spurred by inventionssuch as the automobile, the airplane, andthe computer. Technological innovationcan create new markets where noneexisted before. They can transform theeconomy, the workplace, and the culture.After the economy has absorbed thechange, it may slow down again. SeeFigure 6-4.

• Government policies. As you’ll learnin Section 6.3, government actions—taxcuts, spending, and regulation of themoney supply—cause fluctuations inbusiness cycles. Government policies caneither help or hurt the economy.

• War. During wartime, demand for goodsand services associated with the war effort

increases. For example, troops need uni-forms, weapons, medical care, food, andtransportation. Government spending fornational defense pumps billions of dollarsinto the economy. Therefore, war is asso-ciated with economic expansion.

MEASURING THEECONOMY’SPERFORMANCE

How the economy is doing will affecteverything from government policy on interest rates to how much of a raise anemployee gets. Economists keep an eye onthe economy by measuring its performancethroughout the year. Measurements used tomonitor the health of the economy are calledeconomic indicators.

6-4

In the 1990s, the growth of the

Internet created a “dot-com”

boom. New Internet-based

businesses seemed to spring up

overnight, but many eventually

failed. How do you think the

economy was affected?


ing that can be compared from one nation toanother. You may also see the term real GDP,which refers to GDP figures that have beenadjusted for inflation.

Unemployment RateNews of the monthly unemployment rate

is often on the front pages of newspapers oris the lead story in their business sections.This statistic is the percentage of the civilianlabor force that is without a job but activelylooking for work.

A high unemployment rate is a sign thatthe economy is ailing. When large numbersof people are without work, productiveresources are being wasted. Unemploymentcan also drain government resources, asunemployed workers often need state andfederal financial assistance to pay for basicneeds. In addition, the personal ravages ofunemployment are easy to see. Being out ofwork can disrupt family life and cause one tolose feelings of worth and self-respect.Maintaining a low unemployment rate is apriority for government officials. Employedpeople are more able to be self-sufficient,which helps to stabilize the economy.

Since World War II, the unemploymentrate has mostly stayed between 3% and

Economists track many types of economicindicators. Among the most widely reportedare measurements of production, unemploy-ment, and inflation. Understanding their sig-nificance, and paying attention when theychange, can help you make informed con-sumer decisions.

Gross Domestic ProductThe gross domestic product, commonly

called the GDP, is the total dollar value ofgoods and services produced in a countryduring the year. Goods are counted in theGDP only when they are new. Only finalproducts are included so that the same goodsare not counted twice. For example, tires thatare shipped to an auto assembly plant are notcounted separately. Their value is included inthe value of the new cars that roll off theassembly line.

The GDP is the broadest measure of theeconomy. It provides a way of comparingwhat was produced in one year with whatwas produced in another year. When theGDP increases too quickly, inflation maybecome a problem. When it increases tooslowly, unemployment may rise. Dividingthe GDP by the size of the population (GDPper capita) reveals a national standard of liv-

To find out the current values of major economic indicators, such as the unemploy-ment rate, GDP, and consumer price index, try these sources:• The business section of your local newspaper.• Business publications such as BusinessWeek and The Wall Street Journal.• Web sites of the Bureau of Labor Statistics, the Bureau of Economic Analysis, and

the Federal Reserve Board.

Current Economic Indicators


11%. Economists generally consider theeconomy to be at full employment when thenation’s unemployment rate is below 5.5%.This figure accounts for the fact that at anygiven time, there will always be some peopleexperiencing short-term unemployment.Unemployment may vary from area to area,so rates are also figured for states andmunicipalities (cities and towns).

Consumer Price IndexAn important measure of inflation is the

consumer price index, or CPI. It measuresthe change in prices over time of a specificgroup of goods and services. The group ofitems, called a market basket, includes over200 categories of goods and services that theaverage household uses. Represented in themarket basket are food and beverages, hous-ing, apparel, transportation, medical care,recreation, education and communication,and other goods and services.

The consumer price index is not the dol-lar value of the market basket items. Rather,it is a number that relates the current price ofthe market basket to the price during a spe-cific time period in the past. The price dur-ing that past period is assigned a CPI value of100. If the current CPI is 180, for example,that means the price of the market basket is80% higher than it was during the compari-son period.

Each month, the percentage change in theCPI is reported by the Bureau of LaborStatistics. If the CPI was 180 last month andis 181 this month, the monthly change isaround +0.5%.

LOCAL, NATIONAL, ANDGLOBAL ECONOMIES

Economic conditions can vary from onepart of the country to another. Climatechanges, natural disasters, population shifts,the availability of workers, local governmentpolicies, and the fortunes of local businessesare a few of the factors that cause variations.For example, farmers in one region may gobankrupt after a severe drought even thoughthe national economy is booming. Residentsof a small community might increase theirwealth when a large business opens its doorsand creates jobs.

Local economies and the U.S. economyare not insulated from the rest of the world.The economies of every nation are becomingincreasingly interdependent. A recession inthe United States can trigger economic slow-downs around the globe. A rise in oil pricesoverseas can register as increased inflationhere. You can read more about the issues ofglobal economics in Chapter 7.

Section 6.1 Review

CHECK YOURUNDERSTANDING

1. What are the phases of a business cycle?

2. How are consumers affected by inflation?

3. How might technological innovationaffect the economy?

CONSUMER APPLICATIONEconomic Indicators Look up the currentvalues of the three economic indicatorsdescribed in this section. Explain how thesemeasurements might affect consumer pur-chasing decisions.

S E C T I O N 6 . 2

Deficits andDebt

Balancing the budget, deficit spending,the national debt—you may haveheard or read the terms in news reportsabout the economy. What do theymean for consumers, including you?

THE BUDGET PROCESSSection 5.4 explained where the government gets its

money and how that money is spent. Taxes, especially per-sonal income taxes, provide most of the federal govern-ment’s revenue. Almost half of this money is spent on acombination of Social Security, Medicare, and incomesecurity programs that help people in need. The federalgovernment also spends money for national defense andother purposes.

Like individuals, governments create budgets to managetheir spending. A budget is an estimate of anticipatedincome and expenses for a certain period of time. Eachyear, budgets are created by government officials on thefederal, state, and local levels.

The federal budget is based on a fiscal year that begins onOctober 1 each year. Long before then, the Office ofManagement and Budget, part of the Executive Branch,begins work on a budget proposal. After reviewing andapproving the proposed budget, the President submits it toCongress for debate. Throughout the budget process, thegoal is to balance the budget so that planned spending does

Objectives

After studying this section, youshould be able to:• Distinguish between a budget

surplus and a budget deficit.• Identify reasons for deficit

spending by governments.• Analyze the effects of the

national debt on consumers.

Key Termsbudgetbudget surplusdeficit spendingbudget deficitnational debt

162

Section 6.2 Deficits and Debt • 163

not exceed projected revenue. Priorities mustbe weighed and compromises struck. Even-tually, the House of Representatives approvesthe final budget and it becomes law.

After the fiscal year ends on September30, the actual amounts of revenue andspending are reviewed and compared. Ifmore money was collected than spent, theresult is a budget surplus. It’s far more com-mon, however, for the amount spent toexceed the revenue collected.

DEFICIT SPENDINGThe practice of spending more money

than was received in revenue is called deficitspending. The amount by which spendingexceeds revenue is the budget deficit. Figure6-5 shows the historical pattern of budgetdeficits and surpluses.

The causes of budget deficits vary. Warstend to trigger deficit spending as thegovernment spends billions of dollars ondefense. Deficit spending also tends to occur during a recession—the governmentincreases spending to provide benefits forpeople who are out of work, while receivingless revenue from income taxes. Budgetdeficits can also occur because of policy deci-sions by Congress and the President.

6-5

The federal budget had a deficit every

year from 1970 to 1997. What might

account for the budget surpluses in the

late 1990s?


amount of money that the federal govern-ment owes is the national debt, also knownas the public debt. Due to the large and con-sistent deficits that occurred in the past,the national debt has grown to enormoussize. By early 2006, it totaled more than $8 trillion.

During the prosperous 1990s, someexperts said that the national debt would beeliminated as the economy continued togrow. They anticipated continued budgetsurpluses that could be used to pay backmuch of the debt. However, deficit spendingagain became necessary when the UnitedStates went to war in late 2001.

What’s the Impact?Some policymakers and economists are

not worried about the national debt. Theysay that if it’s expressed as a percentage of

THE NATIONAL DEBTWhen consumers choose to spend more

than they earn, they borrow money by usinga credit card or getting a loan. When the gov-ernment has a budget deficit, it must borrowmoney too. It does this by selling varioustypes of securities, such as savings bonds andTreasury bills, to individuals, corporations,and financial institutions.

Someone who buys a savings bond isloaning money to the government for a cer-tain period of time. The government agreesto pay back the original amount plus interest.

Thus, a savings bond is not only an invest-ment option for the person who buys it, butalso a way for the government to finance itsprograms during periods of deficit spending.See Figure 6-6.

Each year that the government has abudget deficit, it borrows an additionalamount, adding to what it owes. The total

6-6

During World War II, First Lady

Eleanor Roosevelt was among

the many public figures who

encouraged Americans to buy

bonds. How did purchasing

bonds aid the war effort?

Section 6.2 Deficits and Debt • 165

gross domestic product, the national debtactually decreased from World War II to thepresent.

However, the national debt is of concernto many people. They point out that intereston the national debt eats up a significantportion of the federal budget each year. Thistakes away money that could otherwise bespent on government services and programssuch as education, health care, public trans-portation, and public safety. In recent years,for example, interest paid on the nationaldebt has exceeded what the federal govern-ment spends on education.

If citizens are concerned about thenational debt, what can they do? Voters electthe politicians who create budgets anddeficits. By studying the issues and usingtheir voting power, consumers can helpshape responsible government policies. SeeFigure 6-7.

Section 6.2 Review


1. How does the government determinewhether there is a budget deficit or abudget surplus?

2. Identify two reasons the federal govern-ment might engage in deficit spending.

3. How does the national debt affect consumers?

CONSUMER APPLICATIONFederal Budget Research the federalbudget for the current fiscal year. Is adeficit or a surplus projected? What rea-sons are given for the deficit or surplus?Explain how you, as a consumer, mightuse this information.

6-7

Budgeting and spending decisions

made by the President and Congress

affect the size of the national debt.

How can citizens stay informed

about these decisions? How can

they influence them?

S E C T I O N 6 . 3

Stabilizing theEconomy

Consumers benefit when prices arestable and economic growth is steady.By working to stabilize the economy,the government hopes to minimizeboth inflation and unemployment. Thetools at its disposal include fiscal pol-icy and monetary policy.

FISCAL POLICYFiscal policy refers to the federal government’s use of

taxing and spending policies to help stabilize the economy.The President and Congress can raise or lower taxes andincrease or decrease government spending. Each of theseactions has an effect on the economy.

For example, if economists see a possible recession onthe horizon, one way to give the economy a boost might beto cut personal taxes. Putting more money into consumers’hands allows them to buy more goods and services,increasing demand and spurring the economy. Anotherapproach might be a tax break for businesses, making iteasier for them to invest in capital goods, expand produc-tion, and create new jobs.

Still another possibility is to increase governmentspending. In a recession, businesses cut back on theirspending—they shut down factories, lay off workers, andso on. The government might try to offset this decline by

Objectives

After studying this section, youshould be able to:• Compare and contrast fiscal

and monetary policy.• Explain the role of the Federal

Reserve System.• Analyze how the Fed’s actions

affect consumers.

Key Termsfiscal policymoney supplymonetary policyFederal Reserve SystemFederal Reserve Boardfederal funds ratedicount ratereserve requirement

166

Section 6.3 Stabilizing the Economy • 167

funding a major construction project thatwould create jobs and keep money flowing inthe economy. See Figure 6-8.

When the economy is booming, there’s adanger that too-rapid growth will lead tohigh inflation. Raising taxes siphons offmoney consumers and businesses wouldotherwise spend, keeping growth in check.The government might also limit economicgrowth by decreasing its own spending.

Many economists believe that fiscalpolicy, if used wisely, can be a powerful toolfor managing the economy. However, it’s animprecise tool. The economy is complex, andit can take months for fiscal policy to have aneffect.

Fiscal policy has other drawbacks aswell. At times, the goals of fiscal policycan conflict with other goals of govern-ment, such as to improve education,strengthen national defense, or makehealth care available to the needy. Inaddition, political leaders—wary ofangering taxpayers and special interestgroups—may be reluctant to raise taxesor cut spending.

MONETARY POLICYFiscal policy is not the only tool for

stabilizing the ups and downs of theeconomy. Another approach is to regu-late the money supply, which is the totalamount of money in circulation at any

given time. Efforts to stabilize the economyby regulating the money supply are known asmonetary policy. Whereas fiscal policy iscarried out by the President and Congress,monetary policy is carried out by thenation’s central bank.

The Federal ReserveSystem

The Federal Reserve System is the centralbank of the United States. The Fed, as it’soften called, provides financial services to thebanking industry and the government. Italso regulates banks to make sure that theyfollow the law. However, the primary respon-sibility of the Fed is to set monetary policy.

6-8

Federal projects, such as building a

new hydroelectric dam, can pump

money into the economy. Who

would benefit directly from such a

project? Who benefits indirectly?


The Fed and the MoneySupply

The Fed sets monetary policy by takingaction to increase or decrease the moneysupply. The money supply is significantbecause it affects the availability of credit. Inturn, the availability of credit affects businessexpansion and consumer purchasing, onwhich the growth of the economy depends.

When the Fed increases the money supply,credit becomes more available and less costly.This enables consumers to spend more andbusinesses to borrow money for expansion.New jobs are created and output is raised.Because it promotes economic growth,increasing the money supply can head off arecession or make an existing one shorter andless severe.

On the other hand, when the Fed decreasesthe money supply, credit becomes harder toget and more expensive. As a result, con-sumers and businesses cut back on spendingand investing. Curbing economic growth inthis way can help to control inflation.

The governing body of the FederalReserve System is the Board of Governors,commonly known as the Federal ReserveBoard. Its seven members are nominated bythe President and confirmed by the Senate.These seven people, along with five presi-dents of district Federal Reserve Banks, makeup a group called the Federal Open MarketCommittee (FOMC). The FOMC monitorsthe health of the economy and decideswhether changes in monetary policy areneeded.

Eight times a year, the FOMC holds itsregularly scheduled meetings. After eachmeeting, the committee releases a statementannouncing its actions and explaining thereason for them. In addition, the chairpersonof the Federal Reserve Board meets withCongress twice a year to give updates on theeconomy’s health and the Fed’s monetarypolicy goals. Investors pay close attention toFed announcements and reports. The stockmarket often rises or falls depending onwhether the Fed’s outlook seems optimisticor pessimistic. See Figure 6-9.

6-9

This is the trading floor of the

New York Stock Exchange.

Actions by the Fed can have

strong impact on the stock

market.


The Fed can manipulate the money sup-ply in three ways. It can engage in open mar-ket operations, raise or lower the discountrate, and adjust the reserve requirement.

Open MarketOperations

The Fed can affect the money supply byselling or buying government securities—stocks, bonds, and other financial assets—inthe open market. This is the most importantand frequently used tool the Fed has at itsdisposal.

If the Federal Open Market Committeedecides to decrease the money supply, itdirects the Federal Reserve Bank of New Yorkto sell some of its holdings of governmentsecurities. On the open market, anyone canbuy these securities, including banks andother financial institutions, individuals, andbig corporations. To pay for the governmentsecurities, buyers typically write checks tothe Fed, which takes money out of circula-tion. On the other hand, if the FOMC wantsto increase the money supply, it directs theFed bank to buy securities. In so doing, theFed pumps money into the economy.

Open market operations have an effect onthe federal funds rate. This is the interestrate at which banks lend money to oneanother overnight. The federal funds rate,although not directly controlled by the Fed,is strongly influenced by the Fed’s actions.When the Fed decreases the money supply byselling securities, the federal funds rate goesup. When the Fed increases the money sup-ply by buying securities, the federal fundsrate goes down. The Federal Open MarketCommittee periodically sets and announcesa target level for the federal funds rate. At thesame time, it takes action that will cause therate to move in the desired direction.

Changes in the federal funds rate tend totrigger changes in the interest rates thatfinancial institutions charge consumers andbusinesses. A higher federal funds rate leadsto higher interest rates for consumers,encouraging them to save. A lower federalfunds rate leads to lower rates for consumers,encouraging them to borrow and spend.

DOLLARSandSENSE

If you stay informed about the Fed’s actions,you can take advantage of current interestrates.

• When the Fed lowers interest rates, it maybe a good time to borrow money, as long

as your employment is secure and yourearnings are not changing.

• When the Fed raises interest rates, it’s atime to curb additional spending and putmore money into savings.

Take Advantage of Interest Rates


Reserve RequirementWhen you make a deposit into a checking

or savings account, your money doesn’t justsit in a vault. The bank may lend your moneyto a new business or to a family buying ahome. However, by law, financial institutionscannot lend out all of the money that theytake in. They must hold a portion of it inreserve.

The Fed sets the reserve requirement—the percentage of a bank’s deposits that itmust keep on hand. If a bank’s customershave deposited $100 million and the reserverequirement is set at 10%, the bank musthold $10 million in reserve. See Figure 6-10.

Holding money in reserve takes it out ofcirculation. Thus, raising the reserve require-ment decreases the money supply. Loweringthe reserve requirement increases the moneysupply, since banks have more money avail-able to lend to consumers and businesses.However, since the Fed’s ability to adjustreserve requirements is limited, this policytool is rarely used.

The Discount RateSometimes banks borrow money from the

Federal Reserve Bank. Like consumers whotake out loans, banks pay interest when theyborrow money. The interest rate that bankspay to the Fed is called the discount rate.The Fed has the power to directly set the dis-count rate.

If the Fed thinks the economy is slowingdown, it might lower the discount rate. Thiswould encourage banks to borrow moremoney from the Fed, increasing the moneysupply. On the other hand, if the economy isthreatened by inflation, the Fed may raise thediscount rate. This discourages banks fromborrowing from the Fed and shrinks themoney supply.

However, the direct effect of changes in thediscount rate on the money supply is usuallysmall. Often the real purpose of changing thediscount rate is to signal a major change inthe Fed’s monetary policy. As with the federalfunds rate, changes in the discount rate tendto trigger corresponding changes in interestrates that affect consumers.

6-10

A bank’s reserves may be

stored in its vault or kept on

deposit at a Federal Reserve

Bank. Why do you suppose

banks are required to keep

reserves?


Effects on ConsumersLike fiscal policy, monetary policy can

sometimes misfire. However, everyone bene-fits from Fed policies that allow the economyto operate more smoothly and efficiently.Fed policies impact several areas of your life,such as:

• What you’ll pay for goods andservices. The Fed keeps a watchful eyeon inflation. When prices creep up, theFed often acts to prevent them from risingtoo fast. See Figure 6-11.

• Your ability to get credit and theinterest rates you will pay. Since Fedpolicies regulate the money supply, theyimpact your ability to get credit and theinterest rates you will pay for loans andcredit card balances.

• What you’ll earn in interest. Fedpolicies affect interest rates that financialinstitutions must pay you for savingsaccounts, certificates of deposit, andother investments.

• Your job stability and the wagesyou are paid. By increasing the moneysupply, the Fed encourages the creation ofnew jobs. Decreasing the money supplycan have the opposite effect. When thereare plenty of jobs, wages tend to increaseas employers try to attract and retainworkers. When jobs are scarce, wages tendto fall.

Section 6.3 Review


1. What is fiscal policy? Give an example ofhow it’s used.

2. What group carries out monetary policy?

3. Name four ways in which monetary pol-icy actions affect the lives of individualconsumers.

CONSUMER APPLICATIONTax Credit In 2001, the federal governmentcut taxes and sent a credit of several hun-dred dollars to most taxpayers in the mid-dle of the year. What was the government’spurpose in doing so? What would you havedone with such a refund?

6-11

Actions taken by the Federal Reserve

Board affect the everyday lives of

consumers. How does the Fed control

inflation?

1. What happens during the contraction phase ofthe business cycle? The expansion phase? (6.1)

2. What is a recession? How are consumersaffected by it? (6.1)

3. Describe the economic event that happened inthe 1930s. (6.1)

4. Explain how consumer confidence affects thestate of the economy. (6.1)

5. What are economic indicators? Give threeexamples of these indicators. (6.1)

6. Explain what the gross domestic product andthe consumer price index each measure. (6.1)

7. How can creating a budget help a governmentmanage its spending? (6.2)

8. How does a budget surplus differ from abudget deficit? (6.2)

9. Name two situations that often lead to deficitspending. Explain why they have that effect.(6.2)

10. What causes the national debt to increase?(6.2)

11. Explain a negative effect of the national debton consumers. (6.2)

12. How are fiscal policy and monetary policyalike? How are they different? (6.3)

13. What is the Federal Reserve System? What areits responsibilities? (6.3)

14. What could the Federal Reserve Boardachieve by lowering either the reserve require-ment or the discount rate? (6.3)

15. Explain how Federal Reserve actions can affectthe cost of credit to consumers. (6.3)

C H A P T E R S U M M A R Y

•The U.S. government regularly measures thestate of its economy. The economy goesthrough phases of ups and downs called thebusiness cycle. (6.1)

•Government spending practices create budgetsurpluses or budget deficits. The size of thenational debt affects how revenues are spent.(6.2)

•The U.S. government’s fiscal policy helps tostabilize the economy. The Federal ReserveBoard, an agency of the U.S. government,tries to stabilize the economy by regulatingthe money supply. (6.3)

Greener Pastures: Frank is anticipatinganother brisk season in the lawn-mowingbusiness. He’s thinking of buying a ridingmower so that he can cut more lawns morequickly. However, he’ll have to take out aloan to afford one. How can looking at eco-nomic trends and indicators help him decidewhether to make this investment? (6.1)


Review & Activities •173

1. Understanding Cause and Effect: How dointerest groups affect local, state, and federalbudgets? Do these influences differ at eachlevel? (6.2)

2. Drawing Conclusions: Why do you thinkbudget deficits are more common than budgetsurpluses? (6.2)

3. Making Predictions: The Federal ReserveBoard is independent of the President andCongress. How might its monetary policydecisions be affected if it were under the con-trol of one or the other? Why? (6.3)

4. Analyzing Economic Concepts: Using thelaws of demand and supply, explain why theFed’s open market operations affect the federalfunds rate the way they do. (6.3)

1. Inflation Calculation: Determine the cost often products your family buys. Using CPI dataor an online inflation calculator, learn howmuch the items cost in the year you were bornand also ten years before that. Chart the com-parisons. (6.1)

2. GDP Analysis: Use online resources to deter-mine three factors that affect the gross domes-tic product. How do the factors affect theGDP? Summarize results in writing. (6.1)

3. Unemployment Rates: Compare recent unem-ployment rates in the country’s states. Whichstates have the lowest and highest rates? Howmight you account for the differences? What isthe unemployment rate in your state? How hasit changed in recent years? (6.1)

4. Letter to a Lawmaker: Write a letter that youmight send to your U.S. representative express-ing your views about the national debt andgovernment fiscal policy. Support your opin-ion with facts and figures obtained from reli-able sources. (6.1, 6.2)

5. Effects of a Rate Change: Choose one of thefollowing: banks, consumers with large savingsaccounts, consumers who have just taken out ahome loan, or consumers who are about toapply for a home loan. Write a scenario thatshows how that group might be affected if theFed lowers the discount rate. (6.3)

• Family: Discuss how your family mightbe affected by such conditions as highinflation or recession. Consider how theeffects might differ if your family incomecame from different types of sources.(6.1)

• Community: Research and report onyour local (or state) government’sbudget. Who is involved in creating andapproving it? Does deficit spending everoccur? Why or why not? What happensif there is a deficit? (6.2)

SECTION 6.1 SECTION 6.2 SECTION 6 - Weeblyolchsconsumered.weebly.com/uploads/6/8/8/8/6888548/chap06_1.pdfSECTION 6.1 Economic Ups and Downs Throughout U.S. history, there have been

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