demand will convince businesses to hire more workers, reducing unemployment. Sometimes the government increases spending. By buying more goods and services itself, it tries to convince businesses to hire more workers to boost production.

Unfortunately, political differences often prevent che effective use of fiscal policy. Specifically, it is usually difficult to implement effective fiscal policies when recessions are short and political leaders have different ideas about whether to cut taxes or increase spending.

Cause and Effect How might a decrease in taxes raise employment?

Price Stability

Another important indicator of an economy's performance is inflation. This is a sustained increase in the general level of prices. Inflation hurts the economy because it reduces the purchasing power of money and may alter the decisions people make.

lb keep track of inflation, the government samples prices every month for about 400 products commonly used by consumers. Hie prices of these 400 items make up the consumer price index (CPI), which is a popular measure of die price level.

Typically, the prices of some items in the CPI go up every month, and the prices of others go down. However, the change in the average level of prices as measured by the CPT determines the rate of inflation.

Inflation and the Value of Money

Suppose that an ice cream cone that costs you a dollar doubles in price. This price increase causes the purchasing power of your dollar to fall because you have to use twice as many dollars to buy the same

Unemployment and the Business Cycle

Period of Recession lu

Period of Recession

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Analyzing Graphs

The unemployment rate is calculated by dividing the number of unemployed persons by the number of workers in the civilian labor force. How would you characterize the unemployment rate during the period from 1991 to 2001?

Chapter 23 Government and the Economy 511


Political Cartoons

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Analyzing Visuals The history of the stock market demonstrates that periods of upward movement are often followed by sharp drops. How would you answer the question posed in the caption of this cartoon?

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U»M*irtl yj/MTiin J ■su^-^ifrr.Hiyn t item. Inflation is particularly hard on people who have fixed incomes—people who get a pension or other fixed amount of money. Inflation also reduces the value of money in a savings account because it will buy less after inflation than before.

Prices provide the signals that help individuals and businesses make the economic decisions that allocate the factors of production. High rates of inflation distort this proccss because people begin to speculate, or buy things like land, works of art, or other things they think will go up in value.

When speculation takes the place of investment in capital goods or services such as education, the economy begins to suffer. Unfortunately, the government itself can do very litde to prevent inflation because inflation results from monetary policy decisions. You will read about monetary policy and how the Federal Reserve System implements monetary policy in the next chaptcr,

*4wr-fill IT! flfP* Identifying What is a prolonged rise in the general price level of goods and services called?

Stocks and Stock Markets

You hear news about the stock market every day: "The Dow Jones Industrial Average rose 2 percent today/' or "Standard & Poor's announced that the stock market fell following a rise in interest rates"What do these statements mean and what do they tell us about the state of the economy?

Why Stock Prices Change

Investors normally want to buy stock if they think they will make money on it. Profits from stock come in two ways from dividends or from capital gains. Dividends are a share of the corporation's profits that are distributed to shareholders. A capital gain occurs when stock can be sold for more than it originally cost to buy.

The price of a company's stock, like most other things, is determined by supply and demand. Factors such as changes in sales or profits» rumors of a possible takeover, or news of a technological breakthrough can change the demand for a company's stock and, therefore, its price.

512 Chapter 23 Government and the Economy

Stock Market Indexes

Because most investors arc conccrncd about the performance of their stocks, they often consult stock indexes—statistical measures that track stock prices over time. The Dow-Jones Industrial Average (DJTIA) and Standard and Poor's (S&P) arc the two most popular indexes. The DJIA tracks priccs of 30 representative stocks, and che S&P 500 index tracks the prices of 500 stocks. Both measures give us an idea of the well-being of the stock market as a whole.

Stock Exchanges

Stocks in publicly traded companies arc bought and sold at a stock market, or a stock exchange, a specific location where shares of stock are bought and sold. The exchange makes buying and. selling easy, but you don't have to actually travel to a stock exchange in order to buy or sell stock. Instead, you can call a stockbroker, who can buy or sell the stocks for you.

The first stock exchanges started in parts of Western Europe, then spread to other parts of the world. Most stocks in the United States are traded on the New York Stock Exchange (NYSE), the American Stock Exchange, or an electronic stock market like the NASDAQ. The NYSE, located on Wall Street in New York City, is the oldest, largest, and most prestigious. Stock cxchangcs can also be found in Sydney, Tokyo, Singapore, Moscow, and most other major cities. Computer technology and electronic trading make it possible for investors to trade major stocks around the clock, anywhere in the world.

The Stock Market and the Economy

Indexes like the DJIA and the S&P 500 do more dian tell us about the general level of stock prices they reveal investors' expectations about the future. If investors expect economic growth to be rapid, profits high, and unemployment relatively low, then stock priccs tend to rise in what is referred to as a "bull market" If investors are pessimistic, stock prices could fall drastically in what is called a "bear market.'"

flTffi'ffffiSE Explaining What are dividends?

Student Web Activity Visit civ.£ and click on Student Web Activities— Chapter 23 to learn more: about measuring our economy.


Checking for Understanding

1. Key Terms Use each of these Lerrns in a complete sentence that will help explain its meaning: real GDP. business cycle, Chilian labor force, unemployment rate, fiscal policy, inflation, consumer price index (CPI).

Reviewing Main Ideas

2. Identify What are the two main phases of a husiness cyclo?

3. Describe What does the con sum er price index track?

Critical Thinking

4. Analyzing Information How is Lhe unemployment rale computed?

5. Drawing Conclusions On a chart like the one below, evaluate how a sharp increase in inilalion might afiecL these individuals.

Inflation Rises


A doctor on staff at a large hospital

Retired autoworkcr on c) lixed pension

6. Describe Study the graph show in£ Lhe phases of die business cycle on page 509. How are the recessionary periods in this graph illusLrated?


7. Analyze Try to analyze what you think occurs throughout the economy during a recession. Make a list of some of the things that business owners may do in reaction Lo a recession.

Developing Multimedia Presentations

Why Learn This Skill?

When you communicate with someone, you use a certain medium. The most common medium you use is your voice, an audio medium. When you make a formal presentation before the class, however, you may want a more vivid approach. You could use more than one medium. In other words, you could develop a multimedia presentation.

Learning the Skill

To develop a multimedia presentation, follow these steps:

• Select one or more partners to work with you. You may need help in preparing and assembling different components.

• Prepare still visuals such as posters. Your posters may show charts, time lines, tables, drawings, or photographs.

• Make sound recordings. Use an audio recorder to present speeches, interviews, and such. You might record background music and noises such as traffic, machinery, or crowds.

Making a presentation

■ Use a still camera to make slides. Project the slides and use thern as talking points in your presentation.

■ Create a video with a camcorder. Your videotape may combine actions, scenes, and sounds related to your report. You might also record your whole report on video and play it as a taped presentation rather than a live one.

Practicing the Skill

Read the items numbered 1-4 below. They represent four events in the experience of Cameron and Celia as they open a newtaco restaurant. Read the multimedia components lettered a-d. Copy the four events on a separate sheet of paper. Beside each event, write the letter of the component you would choose to illustrate it in a multimedia presentation of Cameron and Celia's business experience.

O Planning stage © Influence of supply and demand O Opening of shop O Advertising for new business a. Video of small number of customers entering shop and enjoying the tacos b> Photo of crowded taco shop with menu showing increase in prices c. Poster chart of expected expenditures, receipts, and profits d. Audiotape of a radio commercial

—Applying the Skill-

With a partner, plan a multimedia presentation ill us Leu ling how Lhe business cycle works and its effects on businesses and consumers. Then produce one of the media components in your plan.


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