Chapter Two
Economics: The Framework for Business

Review Questions

1. How did the global economic crisis unfold?

Started about 2 decades ago during the time of prosperity. America enjoyed unprecedented growth, our unemployment rate was long. Also, productivity was high, inflation was low, and the real standard of living for an average American rose big time. The American economy jumped up nearly 33% in just 5 years. However, the scene changed for the world when dot.com burst in 2000, followed by 9/11 in 2001. Stock markets dropped, unemployment rose, we feared we were on the brinks of a full blown recession.

2. What steps did the Federal government and the Federal Reserve take to mitigate the crisis?
Federal Reserve decreased interest rates by from 6.5% in 2000 to 1.25% by the end of 2002. People could finally afford homes, and borrow money with little to no interest. With people taking the offers, the need for homes when up and then people taking mortgages out on them, the economy began to rise and has continued.

3. Compare and contrast microeconomics and macroeconomics. How do the two approaches interrelate? Use a specific example to explain.
Compare-
Their careers are the same- economists (general), professors, research, financial advisor.

Contrast Macro, is the branch that looks at the economy in a broad sense and deals with factors affecting the national, region, or global economy. Micro, is the branch that looks at the economy on a smaller scale and deals with specific entities like businesses, households, and individuals. Their foundations, basic concepts, and applications are also different.

4. What is the difference between fiscal and monetary policy? What role does politics play in shaping these policies?

Fiscal policy refers to the government efforts to influence the economy through taxation and spending. Decisions that are designed to encourage growth, boost employment, and curb inflation. Fiscal strategies are closely tied to political philosophy.
Monetary policy refers to the actions that shape an economy by influencing interest rates and supply of money. The federal reserve- essentially the central bank of the U.S.- manages monetary policy

5. What are the fundamental elements of the free market economic system? How can businesses thrive within this system?

Free market economic system is also called capitalism, also known as “ private enterprise” or “free market.” Capitalism is based on private ownership, economic freedom, and fair competition.

6. Describe the 4 degrees of competition within the free market system. Offer 2 to 3 examples of each type of competition.

|Degree of competition |Examples |
| |Many equal sellers |
|Pure | |
| | |
| |Many sellers producing similar products that are perceived as |
|Monopolistic |different by buyers |
| | |
| |A few sellers dominate the market |
|Oligopoly | |
| | |
| |Only one major seller |
| | |
|Monopoly | |
| | |

7. Why does quantity supplied tend to increase when prices go up and decrease when prices go down? Why quantity does demanded move in the opposite direction?

People aren’t willing to pay when the prices go up so they collect in the warehouse, when this happens the lower then price because they have to sell it. When that happens people are willing to buy and buy multiplies. Also the demand for a products, the people are willing to spend the highest asking price for the product because they want it and when the demand is no longer high they will lower the price, so they can finish selling and making a profit.

8. Describe the key principles of socialist and communist economic systems. Does more government control mean less economic opportunity? Why or why not?
Socialist- an economic systems based on principles to the government should own or operate, such as, health care, public welfare, utilities, and telecommunications. They have higher tax so less economic opportunity because people don’t want to give the government everything.
Communist- public controls everything, systems fail because there’s no rules or people can’t think for themselves, they have shortages because people don’t know what to grow or things to produce. We need a mixed economy so everyone is happy and healthy, we won’t have shortages and we won’t be overrun by the government.

9. Why do most countries have neither “pure” market nor “pure” planned economies? Is the trend toward the market end of the spectrum likely to continue? Why?

They would make insufficient provision for the old, the young, sick, and the environment. A pure planned economy would not create enough value to support its people over the long term. Yes, so corruption can be cut down and so economic rights can be protected.

10. How do gross domestic product, the employment rate, and the inflation rate relate to the business cycle? Why is it difficult to predict changes in the business cycle?

Gross domestic product, the total value of all final goods and services. Products within ta nations physical boundaries over a given period of time.
Employment rate- the percent of people in the labor force over 16 years who don’t have jobs who are seeking them.
Inflation rate- a period of rising average prices a crossed the economy.’
Business cycle- is the period of contraction and expansion that occurs over time in virtually every economy, “cycle” maybe misleading, since it implies that the economy contracts and expands in a periodic pattern.