Your success in personal finance depends in part on how well you understand the economic environment; the current stage of the business cycle; and the future direction of the economy, inflation, and interest rates.
Where Are We in the Business Cycle?
An economy is a system of managing the productive and employment resources of a country, state, or community. The U.S. federal government attempts to regulate the country’s overall economy to maintain stable prices (low inflation) and stable levels of employment (low unemployment). In this way, the government seeks to achieve sustained economic growth, which is a condition of increasing production (business spending) and consumption (consumer spending) in the economy— and hence increasing national income. Government policies also affect the economy. For example, tax cuts put money into consumers’ pockets, which they are then likely to spend. Tax increases, in contrast, depress consumer demand.
Growth in the U.S. economy varies over time. The business cycle (also called the economic cycle) is a process by which the economy grows and contracts over time, and it can be depicted as a wavelike pattern of rising and falling economic activity in which the same pattern occurs again and again over time. As illustrated in Figure 1.2, the phases of the business cycle are expansion (when the economy is increasing), peak (the end of an expansion and the beginning of a contraction), contraction (when the economy is falling), and trough (the end of a contraction and beginning of an expansion).
An economy is a system of managing the productive and employment resources of a country, state, or community. The U.S. federal government attempts to regulate the country’s overall economy to maintain stable prices (low inflation) and stable levels of employment (low unemployment). In this way, the government seeks to achieve sustained economic growth, which is a condition of increasing production (business spending) and consumption (consumer spending) in the economy— and hence increasing national income. Government policies also affect the economy. For example, tax cuts put money into consumers’ pockets, which they are then likely to spend. Tax increases, in contrast, depress consumer demand.
Growth in the U.S. economy varies over time. The business cycle (also called the economic cycle) is a process by which the economy grows and contracts over time, and it can be depicted as a wavelike pattern of rising and falling economic activity in which the same pattern occurs again and again over time. As illustrated in Figure 1.2, the phases of the business cycle are expansion (when the economy is increasing), peak (the end of an expansion and the beginning of a contraction), contraction (when the economy is falling), and trough (the end of a contraction and beginning of an expansion).
The preferred stage of the economic cycle is the expansion phase, where production is at high capacity, unemployment is low, retail sales are high, and prices and interest rates are low or falling. Under these conditions, consumers find it easier to buy homes, cars, and expensive goods on credit, and businesses are encouraged to borrow to expand production to meet the increased consumer demand. The stock market also rises because investors expect higher profits.
As the demand for credit increases, short-term interest rates rise because more borrowers want money. Consumers and businesses purchase more goods, exerting upward pressure on prices. Eventually, prices and interest rates climb high enough to stifle consumer and business borrowing, send stock prices down, and choke off the expansion. The result is a period of negligible economic growth or even a decline in economic activity
In such situations, the economy often contracts and moves toward a recession.The federal government’s Business Cycle Dating Committee officially defines a recession as “a recurring period of decline in total output, income, employment and trade, usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy.” During recessions, consumers become pessimistic about their future buying plans. The typical U.S. recession is marked by an average economic decline of 2 percent that lasts for ten months with an average unemployment rate exceeding 6 percent. There have been three recessions in the past 25 years.
As the demand for credit increases, short-term interest rates rise because more borrowers want money. Consumers and businesses purchase more goods, exerting upward pressure on prices. Eventually, prices and interest rates climb high enough to stifle consumer and business borrowing, send stock prices down, and choke off the expansion. The result is a period of negligible economic growth or even a decline in economic activity
In such situations, the economy often contracts and moves toward a recession.The federal government’s Business Cycle Dating Committee officially defines a recession as “a recurring period of decline in total output, income, employment and trade, usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy.” During recessions, consumers become pessimistic about their future buying plans. The typical U.S. recession is marked by an average economic decline of 2 percent that lasts for ten months with an average unemployment rate exceeding 6 percent. There have been three recessions in the past 25 years.
Eventually the economic contraction ends, and consumers and businesses become more optimistic. The economy then moves beyond the trough toward expansion, where levels of production, employment, and retail sales begin to improve (usually rapidly), allowing the overall economy to experience some growth from its previously weakened state. The entire business cycle may take four to five years
.
Removing the emotion from your personal finance budgeting will be a work in progress, and you should always remain on guard for over active emotions. guarantor loans
ReplyDeleteFor one thing, enormous businesses are going bankrupt and individuals are being laid off.Investment websites
ReplyDelete