Third Term – Economics 4.1 and 4.2

1.Grade for ENGLISH AND PARTICIPATION (15%, 15%) x Eliminated - Not appropriate for a class that meets only once a week, I still do not know all

of you, for example. This could change for Term 4.

2. GRADE, 3RD TERM50% of grade - 1st Asssessment, week 4 (August 26) – multiple choice, fill-in,

matching, T/F ------ (I will provide a study guide week 3)

50% of grade - 2nd Assessment, week 6 (Sep 9) - multiple choice, fill-in, matching, T/F -------- (I will provide a study guide in week 5)

3.EXTRA CREDIT OPPORTUNITY

One time only, due in week 4. There will be 6 to 10 extra points possible. Send me an email by Wednesday August 14th at 3:00pm, saying that you are interested. If I do not get an email, no extra credit assignment for you.

Economics – 3rd Term4. Video of the dog, why did we see that?

5. Hand-out on your desks, listen for the parts you are not responsible for, the rest you need to know for week 6 assessment

6. Today´s worksheet, work on it in pairs or groups the rest of class, it is not for an assessment but it is highly recomended to finish it at home and bring it to class next Monday

4.3 Economics – 3rd Term

• FINAL CHANCE – ECONOMIC SUPPLY AND DEMAND MODEL, NEXT THURSDAY (week 2), 20 MARK ASSESSMENT

• 16 MARKS FOR EXAM plus 4 marks for HW question

4.3 Economics

• Final Exam for the Term (50%) – Monday of week 7

• Since we are not using English and Participation then the 2 assessments in weeks 2 and 4 will be 25% each of the grade

4.3 Economics – 3rd Term• WEEK 4 ASSESSMENT ON ALL OF THE MATERIAL WE

COVERED AFTER THE ECONOMIC SUPPLY AND DEMAND MODEL

• THE SLIDES WILL BE ON WIKISPACES AT THE END OF THIS WEEK

• It will be necessary to study the slides on Wikispaces and ask the teacher about topics you do not understand

4.3 Economics - Week 4 Assessment

• Multiple choice, fill-in, matching and True/False

4.1 and 4.2

• Today - Review of answers to handout and continuing with Macroeconomics lecture

• Assessment – Week 4

Peruvian Central Bank What are the functions of the BCRP? The BCRP functions, as defined by the Constitution,

include the following: -to regulate money and credit in the financial system - manage international reserves - issue notes and coins

- periodically report on the country’ finances

Autonomy of a central bank

What does the BCRP’s autonomy consist of?

In order to fulfill its mission, the BCRP must enjoy autonomy (independent, not controlled by the government)

Prints the money

Prints the money

Prints the money

More about the BCRP (Peruvian Central Bank)

• What is the mission of the BCRP?

---To preserve monetary stability. The Central Bank has established an inflation target of 2.0%

BCRP actions are oriented towards maintaining this level of inflation in the Peruvian economy.

From its website…..Peruvian Central Bank

Inflation is detrimental to economic development because it prevents money from adequately fulfilling its functions as a medium of exchange, as a unit of account, and as a store of value.

Inflation discourages investment. The devaluation of money resulting from continuous rises in the prices of goods and services affects interest rates and thus both consumers and businesses

Thus, by maintaining low inflation, the BCRP creates the necessary conditions for normal economic activity which, in turn, contributes to achieve higher levels of sustained economic growth.

Exports/Imports - Introduction

• Exports are goods that are made (manufactured, produced) in a country, and sold to a company or person in another country

• Example of a Peruvian export: copper

Imports

• Imports – a country buys a good or service from another country

• Example: Kia (Korea) sells 10,000 Optima model cars to a Lima car dealer

• Has anyone ever seen all the cars sitting in car lots in Callao, when you fly into Lima?

Why do countries export and import?

• No country in the world has all the natural resources, climate or geography to produce all the goods and food required by its population

Many countries have more than enough of a specific resource or product and can export some of this "surplus" to other countries

Example - Canada

• Many Canadians like to eat bananas, which can only be cultivated on tropical climates

• Canada is close to the Arctic circle, no bananas can be grown on its soil and the easiest way to get them is to import them

Canada´s Exports

• But Canada has huge reserves of oil, which some countries do not have at all

• As Canada has more than enough of oil to support its own needs, it can export some of its oil production to countries that require it and are willing to pay for it

Examples of Exporting/Importing - Japan

• Japan cosumes more than 5 million barrels of oil a day

• But it only produces 138,000 barrels a day

• So it must import almost ALL of its oil needs

From your Geography textbook

•Example: Japan, its export and imports…..

Example - Russia

• Produces 11 million barrels of oil a day (number one in the world)

• Uses only 2.5 million barrels a day

• So, it exports the remaining 8.5 million (daily)

• USA (big producer, but big consumer also)

Cap`n Crunch

• Why doesn´t Laive start producing this cereal to sell to Peruvian consumers?

Top 20 Peruvian Exports 1 Copper Ores 2 Refined Copper & Alloys 3 Gold 4 Zinc Ores 5 Meat Flour for Animals 6 Non-Crude Oil 7 Crude Oil 8 Molybdenum Ores 9 Coffee 10 Silver

Top 20 Peruvian Exports11 Lead Ores 12 Iron Ores & Concentrates 13 Knitted Sweaters 14 Fresh Vegetables 15 Tin 16 Zinc 17 Copper Wire 18 Knitted Mens & Boys Shirts 19 Prepared Vegetables 20 Fish Fats & Oils

Top Peru Imports - $41 billion in 2012

• Agriculture and other machinery, certain chemicals, plastics, TVs, telecommunications equipment, iron, steel, wheat, soybeans, vaccines, cotton, paper

• Cars ($2-3 billion)

Peru´s Major Trade Partners

• No surprise……United States, China, Brazil, European Union and Chile

Exports add to the GDP of Perú

• The Peruvian company exporting the good counts the exports as sales (all sales of all companies is the GDP of a country)

What effect does a change in your country´s currency have on your country´s exports?

– If an American and want to buy a Peruvian good, the person or company has to pay for the good in Soles

– So, the American has to take his American dollars and buy Soles first

-If Soles are more expensive (Sol up to 2.40 for example = dollar down), then the Peruvian goods cost more for the American

If this happens… Peruvian exports to the USA will decline

Example

• I am buying a bottle of fish oil for S./100

• The exchange rate is 2.50 Soles to 1 US dollar

• I need 40 US dollars to obtain S./100

• Then with the S./100 I now have I buy the bottle of fish oil

Example

• So, what if the dollar goes down (Nuevo Sol goes up), how does that affect the American company that is buying a bottle of fish oil from Perú?

• We need to do a new calculation to find out how many dollars it takes to get S./100 because it is now different

New calculation

• Suppose the exchange rate is now 2.00 Soles for each US dollar

• So now I need 50 dollars to get the 100 soles instead of 40 dollars

• Americans will buy less fish oil from Peru, this is bad for the Peruvian GDP, but having a strong Sol is good (for purchasing power, interest rates, etc..)…There are always tradeoffs

Peru in 2012 – Budget Surplus, Trade Surplus

Budget Surplus - $2 billion – this is goodWhy? Simple, receipts are higher than expenditures

Trade Surplus - $5 billion – this is goodWhy? Rich minerals are in need around the world, Peru is benefitting

USA - Budget Deficit, Trade Deficit• Budget Deficit $1.2 trillion Why? Taxes too low, spending too much (government services, defense, social security)

• Trade Deficit $487 billion Why a deficit? Oil imports AND products that are being produced with cheap labor are cheaper to buy than to make them in the USA (high labor costs), like for clothing and electronics

Other statistics, Perù

• Top growing economy in all of Latin America the last 12 years

• Real GDP growth now around 5-6%

• Yet inflation is only in the 2-4% range

• Unemployment is in the 7% range

Free Trade Agreements

FDI

Bubbles

We spoke of people getting too overconfident and overinvesting, causing a unsustainable growth with an ugly, ending, here is what the Japanese stock market did

• http://finance.yahoo.com/echarts?s=

%5En225+interactive#symbol=^n225;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

1st bimester

1st bimester recap of the Definition of Economics

• What is the Economic Problem?

• We (you, me, the people of this school, Peru, the World) have unlimited wants and yet finite resources with which to achieve them. We cannot have everything we want.

• This is called a scarcity (limit of) resources so we must decide what we will produce/consume

2nd bimester

The Demand and Supply Curve Economic Model

• Objectives:– Understand the demand curve

– Understand the supply curve

– What happens when supply and demand meet and what causes an increase or decrease in one or the other?

Can of Coke

• How much are you willing to pay for an ice cold can of Coca Cola, that I will allow you to drink in class?

• Let´s graph the result

Can of Coke

• 100 soles?

• 20 soles?

• 12 soles?

• 8 soles? 5 soles? 50 centimos?• Whatt do we have? Go to next slide

The Demand Curve

• As the price increases (goes up) the quantity demanded decreases (goes down) = MOVEMENT ALONG THE CURVE

• However, some things can actually move the curve, examples:– Changes in income (how much they people get paid)– Changes in consumer preference– Competitor prices

Movement (increase or decrease) of the demand curve

Practice:

• In which direction (right = increase or left = decrease) does the demand curve move in

the following situations:– People get a pay rise (or in our example, your parents

give you more money to bring to school)

– A competitor decreases its prices

Movement (Increase or decrease) of the demand curve

– You have a very successful advertisement on TV

– The government increases income taxes

– Ther product is found to be harmful to your health

The Supply Curve

• How much you would have to be paid (in soles, by other students) to be make a Mother´s Day Card that you will make yourself (to sell to other students for their moms)

• For each card, 250 soles, 40 soles, 20 soles, 8 soles, 4 soles, 1 sol What do we have? Go to next slide

The Supply Curve

• As the price increases, supply increases = MOVEMENT ALONG THE CURVE

• However, some things can actually move the supply curve to the right (= increase) or

to the left (= decrease)– Raw materials become cheaper– New machinery– Labor costs go up– Energy costs increase

TODAY´S CLASS – 4.1 & 4.2

• Objective: Solidify our knowledge of Demand and Supply Curve Economic model

• And……teach the absent students about the model…..Students absent last week will be tutored by classmates, and will take a 10 minute quiz at the end of the class

TODAY´S CLASS – 4.1 & 4.2

• Group (Team) Project• TOP Team – 3 Good House Marks for each

team member, and 3 extra points on mid-term exam

• 2nd place Team - 2 GHMs, 2 extra points

• 3rd place Team – 1 GHM, 1 extra point

TODAY´S CLASS – 4.1 & 4.2

• GROUP PROJECT – TWO PARTS (50% EACH PART) 1) Make the best poster(s) possible, explaining

the demand and supply curve economic model

2) TUTORS…..PLEASE TEACH YOUR STUDENT LAST WEEK´S LESSON…….. SO THAT HE/SHE CAN SUCCESSFULLY COMPLETE THE 10 MINUTE QUIZ at the end of class

TODAY´S CLASS – 4.1 & 4.2

• HOW WILL THE WINNING TEAMS BE DETERMINED?

• 50% - YOUR POSTER(s) (0-20 grade)• 50% - THE GRADE OF THE STUDENT OF THE

GROUP ON THE SHORT QUIZ (0-20 grade)

TODAY´S CLASS – 4.1 & 4.2

SCHEDULE• FIRST, A VERY BRIEF REVIEW OF LAST WEEK (5 MINUTES)

• THEN, THE GROUPS ARE ANNOUNCED

• THEN, IN YOUR GROUPS, DECIDE WHO WILL TUTOR THE STUDENT, WHO WILL DO THE POSTER, ETC.. AND GET STARTED

Putting the Demand and Supply Curves Together

• We drew a demand curve

• We drew a supply curve

• When we put them together we have a model for a MARKET FOR A PARTICULAR GOOD OR SERVICE, WHERE BUYERS (DEMAND) AND SELLERS (SUPPLY) MEET

Demand and Supply Curves meet

• The point of equilibrium, where the two curves meet, or market clearing price (point A) is where the quantity demanded equals the quantity supplied at a certain price

Now, how do the four different possibilities look?

1. Increase in demand - DEMAND CURVE SHIFTS TO THE THE RIGHT INCREASE IN INCOME, DECREASE IN TAXES, INCREASE IN THE PRICE OF FANTA, ESPECIALLY HOT WEATHER

• END UP AT EQUILIBRIUM POINT B, with a higher price and a higher quantity demanded

Decrease in Demand

2. Decrease in demand - DEMAND CURVE SHIFTS TO THE LEFT INCREASE IN TAXES, DECREASE IN INCOME, A NEW JOB THAT PAYS LESSS,

DECREASE IN PRICE OF COMPETITORS PRODUCT (FANTA), COLD WEATHER ALL SUMMER

END UP AT EQUILIBRIUM POINT C, with a lower price and lower quantity demanded

Increase in Supply

• 3. Increase in supply - SUPPLY CURVE SHIFTS TO THE RIGHT RAW MATERIALS TO MAKE THE MOTHERS DAY CARD ARE CHEAPER, YOU

GET SOME NEW SCISSORS OR MARKERS OR TAKE AN ART CLASS ANY OF WHICH MAKE YOU ABLE TO MAKE THE CARDS QUICKER, YOUR TEACHERS GIVE YOU EXTRA TIME TO MAKE THE CARDS IN CLASS, FOR COKE COULD BE A NEW DISCOVERY THAT MAKES THE PROCESSS TO MAKE COKE CHEAPER, OR THE TAXES THEY HAVE TO PAY TO THE GOVERNMENT DECREASE, OR THEIR WORKERS BECOME MORE EFFICIENT IN MAKING COKE

• END UP AT EQUILIBRIUM POINT E, with a higher price and lower quantity demanded

Decrease in Supply

Decrease in supply – SUPPLY CURVE SHIFTS TO THE LEFT THE COST OF THE RAW MATERIALS INCREASE, YOUR SCISSORS BREAK AND YOU HAVE TO USE OLD SCISSORS OR BAD MARKERS, OR YOUR TEACHERS DONT GIVE YOU ANY TIME TO MAKE THE CARDS IN CLASS. FOR COKE, COULD BE INCREASE IN THE TAXES THEY HAVE TO PAY, OR THEIR MACHINERY BREAKS, OR THEIR EMPLOYEES SAY THEY WANT TO BE PAID MORE MONEY..

END UP AT EQUILIBRIUM POINT F, with a lower price and lower quantity demanded

Which means…….

• Adriana´s group had the highest overall point total

Adriana´s group - 3 GHMs, 3 extra pointsMariano´s group - 2 GHMs, 2 extra pointsTilsa´s group - 1 GHM, 1 extra point

4.1 and 4.2 - ANSWER KEY AND WIKISPACES

• Answer key being handed out today

• Powerpoint is on wikispaces

• Please be ready for any exam question, and ask the teacher if you need help

• We will have two exams later this term (2 assessments)

4.1 and 4.2 Economics – Rest of Term 2Week 4 – Today

Week 5 – Holiday, no class

Week 6 – 1st Assessment, 35% of Term´s Grade

Week 7 – Macroeconomics continued

Week 8 - 2nd Assessment, 35% of Term´s Grade

Week 9 – Chinese Whisper Game, 4 GHMs/4 extra Points to winning team

Important Macroeconomic Lecture – 5 Interrelated Topics

• Interest rates and Inflation (closely linked)

• Unemployment

• the Business Cycle

• Leading and Lagging Indicators

The Party is going fine Level of Economic Activity =

amount of spending by businesses and people, and how many people are employed and

spending their earnings on goods and services

Rate of InflationAmount of Borrowingby businessesand consumers

Level of Interest Rates

Danger! Things still ok, but may be partying too much

Level of Economic Activity = amount of spending by businesses and

people, and how many people are employed and spending their earnings on goods and services

Rate of InflationAmount of Borrowingby businessesand consumers

Level of Interest Rates

Uh oh, we partied too much - Recession Level of Economic Activity UNEMPLOYMENT

GOES UP TOO HIGH

CAUSING ECONOMIC ACTIVITYTO START TO REVERSE (RECESSION IN WORST CASE)

Inflation is TOO HIGH

SO THE Amount of BorrowingDECREASES

Interest Rates GO UP TOO MUCH

Interest Rates• It is the cost of money, it is what you pay to the bank or

another person who lends you money

• You are the borrower and get a loan, and you must pay the money back to the lender (the bank)

• The terms of your loan (how many years is the loan for, and the interest rate) will be put in a contract called a promissary note, which says that you promise to pay the money back to the lender

Why do you have to pay interest?

• Any bank or company or person that has money can do something themself with it and earn money

• Money is a tool that allows us to make more money (like buying a business that then become profitable and lets you earn more money than you had before)

• So if you are going to use their money instead of letting them use their own YOU OF COURSE HAVE TO PAY THEM FOR USING YOUR MONEY

Interest rates

• So borrowing money is like RENTING money, like if you rent a house in Asia (Perú) for the summer, you pay rent because the owner of the house could either:

• A) spend the summer there themself• B) Let a friend of family member stay there• B) rent it out to someone else and collect rent

Next Definition - Inflation

• Inflation – is the rate of increase in the prices of goods and services in an economy (each country takes a basket of approximately 30 goods and services)

• Every country has its own inflation rate, calculated monthly and annually

• In the rare case that prices are going DOWN, it is called deflation

Goods and Services included in the US inflation rate (called the Consumer Price Index)

• RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions)

• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories)

• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)

Goods and Services included in the US inflation rate (called the Consumer Price Index)

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks)

• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture);

• APPAREL (men's shirts and sweaters, women's dresses, jewelry)

• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

• MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

Inflation

Question: If the inflation rate in 2011 was 3.2% and the inflation rate in 2012 was 2.4%, in 2012 did prices:

A) go down in 2012B) go up at a lesser rate in 2012 than in 2011C) go up at a faster rate in 2012 than 2011

AnswerB) go up at a lesser rate in 2012 than in 2011

Now rising at 2.4% instead of 3.2%

What determines interest rates?

1) The amount of time you have the moneyThe longer the amount of time, the higher the interest rate because there is more of a chance that something could go wrong and you cannot pay back the money

Interest rates – Length of time

• Company A borrows for 1 year Interest rate might be 6%

• Company A borrows for 20 years Interest rate might be 10%

Length of time determines interest rate, example IBMs borrowings

• http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=ibm

What determines interest rates?

2) The general level of interest rates in an economy, which are determined by the inflation rate

If there is high inflation, you are losing purchasing power of your money, so you demand to be paid a higher interest rate so as protect you from that loss in purchasing power

Lost Purchasing Power?

• It means that your money is losing its value (called lost purchasing power)

• If the inflation rate is 2%, your same $1.00 has to worth $1.02 to buy the same amoung of things one year later

• That is why your salary must go up by at least the same amount as the rate of inflation, or you are worse off

And lost purchasing power affects the lenders - Why?

•SO THEY DON´T GET PAID BACK WITH LESS MONEY THAN THEY LENT

Example

• Jan 2014 - borrow $10.00

• 2014 inflation rate = 8%

• December 2014, pay back the $10 to the bank, you are only paying the bank about $9.20

What determines the interest rates?

3) The riskiness of making the loan (who the borrower is)

For example, Microsoft is a less risky company to make a loan to than a small Venezuelan company that has not been profitable (has been losing money)

More on Inflation

• A high inflation rate is very bad for an economy (hurts growth)

• Deflation can also be bad

• Leaving us with the fact that there is an ideal rate of inflation, not too high, not too low, around 2 to 3%

Inflation can be caused two ways

1) Demand pull - the economy is growing too fast (so the demand curve keeps shifting up to the right for all products), increasing prices

2) Cost Push - an event that makes the price of some important goods in the economy go up (and supply curve of many products shifts to the left)

Example of Cost Push Inflation

If there were a war in the middle east between Iraq and Iran, the price of oil would go way up, and it would affect the inflation rate of almost all countries

Inflation

• Inflation in LEDC´s is almost always higher than inflation in MEDC´s

• The MEDC´s have more mature economies and there is less growth and/or fluctuation in the economy, leading the lower, more stable inflation rates

Inflation rates

• LEDCs - 5.5% average

• MEDCs - 2.2% average

• http://www.tradingeconomics.com/country-list/inflation-rate

Inflation – is it good for anyone?

• It is only good for people that have investments, like in real estate (a home or building)

AND NOTE -- There are goods that are have limited supply, and they will be

immune to inflation

The 1913 Liberty nickle (5 cents in USA) is worth $3 million dollars because there are so few of the coins that exist

Why is an increase in inflation bad?

• It makes interest rates go up (lenders need to charge higher rates to protect themselves from inflation)

Why is an increase in interest rates bad?

• If interest rates rise too much, businesses stop borrowing money for projects and expanding (which is what leads to the growth in an economy), and consumers stop borrowing also

• That makes the economy grow at a slower rate, or, when interest rates become really high, it causes a recession

It causes a recession in the worst case!

• A recession is a DECLINE in economic activity for at least six months (two consecutive 3-month quarters)

Recession

• A recession causes people to lose jobs and have hard times

So why do you think deflation is also bad?

• Think about a company that would like to charge more for its product in 2014 than it is charging in 2013 to make more profit……..

ANSWER

• If there is deflation, then the company will have a hard time increasing its prices

• And will make less money, and that can affect many companies and the whole economy

ANSWER

• And if many companies are not making as much money then they cannot emply as many people and we have higher unemployment

Unemployment Rate

• It is the % of workers (over the age of 18) in an economy that do not have a job, and are actively looking for a job

• The government of each country calculates this by taking polls of people and businesses

When do we see high unemployment and low unemployment?

• A low rate of unemployment is GOOD, and we see it when the economy is doing well and inflation is not a problem

• A high unemployment rate is BAD and happens when we have a recession, and it takes a while for the unemployment rate to start falling again

US unemployment rate, 1965 to present

• http://www.tradingeconomics.com/united-states/unemployment-rate

• THE SPIKES UP REPRESENT THE TIME WE HAD A RECESSION, THEN THE SLOW DECLINE IN UNEMPLOYMENT RATE REPRESENTS GROWTH PHASES

• Other statistics for future classes• http://www.tradingeconomics.com/peru/indicators

Types of unemployment• Frictional – the normal movement of various workers from one job

to another, it happens in every country

• Seasonal – If there is a rainy season or very cold winter, there will be less economic activity during that time, more unemployment

• Cyclical – MOST IMPORTANT TYPE - When unemployment increases due to a recession

• Structural – when people do not have the proper training to get a new job after their job has been changed or eliminated due to new technology

The Business Cycle – 5 Stages

The Business Cycle• 5 Stages….

• Growth phase – economy is in low to medium growth mode. It lasts long periods, about 2 to 10 years

The Business Cycle

• Peak – The highest growth rate, but it lasts a short time.

• This level of growth cannot be maintained, a recession will follow because the economy is going too fast, there is inflation,and interest rates are too high

The Business Cycle

• Recession – This is a decline in economic activity, the real GDP goes down for two consecutive quarters (3 month periods)

• What is 1) GDP and 2) real GDP?1) Gross Domestic Product and 2) Gross Domestic Product adjusted for inflation

How long do recessions last?

• On average, about 11 months only

• (compare to 2 to 10 years for growth phase)

The Business Cycle

• Trough - The largest decline in economic growth (the worst performance of the economy)

• It is a short period (last months) because by this time the Central Bank of a country has started to decrease short term interest rates in order to try to revive the economy

The Business Cycle

• Recovery – The economy begins to grow again

• Usually it is the highest growth phase of the entire business cycle (maybe as high as 7% for a MEDC), but soon that growth levels off to a more sustainable rate of growth (around 2% to 3%)

The Business Cycle

• So after the recovery phase WE ARE BACK AT THE GROWTH PHASE, REPEATING THE CYCLE ALL OVER AGAIN

How does an economy get out of a recession?

• Extreme measures?

• http://www.youtube.com/watch?v=fuNGh3MC44Y

The Central Bank has to take the role of Kevin Bacon and Julia Roberts

•What do they do?

4.1 and 4.2 – Begin 3rd Term

• 3rd term…

Review, what is the Central Bank?

• Independent of the government, they set the monetary policy (issue the money, monitor the banks, and control SHORT TERM INTEREST RATES)

• In the USA, called the Federal Reserve Bank in (¨The Fed¨), in Europe, called the European Central Bank (¨ECB¨), and in Perú, Banco Central de Reserva del Perú (BCRP)

From the Peru Central Bank Website

• Central Bank tries to contain inflation!

So what does the Central Bank do about a recession?

• They decrease short term interest rates (the rates they have control of)

• This leads to a decrease in medium to long term interest rates (by market forces), which enables companies and people to borrow again

Central Bank tries to revive the economy

• Sometimes the Central Bank has to cut interest rates several times before hte economy responds, but we eventually get a response AND RECOVERY

Central Bank at workhttp://www.youtube.com/watch?v=xzwZJ0PHe-E

http://www.federalreserve.gov/monetarypolicy/openmarket.htm

http://money.cnn.com/2008/10/08/news/economy/fed_move/

http://www.moneycafe.com/personal-finance/fed-funds-rate/

When companies and people borrow again

• Consumers start spending more

• Companies doing projects for growth (expanding their business).

• When they are spending and building/expanding more, then more workers are needed (unemployment declines)

Central Bank to the rescue

• The new workers, the ones that previously had lost their jobs then have more income

• They start spending their new money, and that helps the businesses that they purchase from

• Those businesses, with new customers, then have to hire more workers, etc…..

Leading and Lagging Indicators – the Roller Coaster comparison

• Leading indicators are statistics that Economists look at to measure economic performance, which will start to change BEFORE THE ECONOMY REACHES THE NEXT STAGE OF THE BUSINESS CYCLE

Leading Indicators

• Leading indicators should be thought of as the first car of a roller coaster car

• Other example of leading indicators –

Consumer confidence index - If consumers are confident this month about things they will be spending more for the next 30 days…..

Leading Indicators – example – new building permits

• When construction companies want to build new buildings, they have to get a permit to do that, so they go to a government office to get the permit

• But they won´t start the construction until they have the permit, and once they have the permit they will be employing workers and ordering materials to do the construction

Leading Indicators

• The government keeps track of how many permits have been applied for each month

• This is an example of a leading incidcator because the number of permits will go up BEFORE the level of economic activity goes up (new jobs, purchasing new materials)

Lagging Indicators

• The opposite of leading indicators, they will change AFTER the economy has started to change

• Example: Consumer Price Index (inflation)- why? It takes time for the market for a good

or service to react to the decrease in demand (to a new, lower equilibrium price)