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On November 26, 2001, the news media announced the United States was officially in a recession, and had been since March. To most Americans, this wasn’t all that surprising: Rising unemployment and a weak stock market had been in the news for months.
Money Makes the World Go Round
A recession is a prolonged period of time when a nation’s economy is slowing down, or contracting. Such a slow down is characterized by a number of different trends, including:
People buying less stuff；
Decrease in factory production；
Growing unemployment；
Slump in personal income；
An unhealthy stock market
By the conventional definition, this slow down has to continue for at least six months to be considered a recession.
This definition really raises more questions than it answers. What does it mean for the economy to slow down? Why does this happen? And what exactly is “the economy”?
People talk about the U.S. economy as an independent entity, but it is actually the result of millions of people’s actions. You can understand the basic idea of the connection between people’s actions and the overall economy by looking at only a few basic concepts: producers, consumers, markets, supply and demand.
Producers and Consumers
Broadly speaking, a nation’s economy is the production and consumption of goods and services in that nation. Anybody producing or consuming things in a country plays some role in the economy.
Production and consumption are intertwined (交織的). In order for people to consume things, someone has to produce those things. And in order to produce things, you need to consume things (you need to consume natural resources and people’s labor, for example).
Markets
In a market economy, or a modified market economy such as the U.S. economy, production and consumption are connected in various “markets”. A market is simply a place where consumers can go to buy things from producers and producers can go to sell things to consumers.
A grocery store is an example of a physical market. People who want to consume food go to the grocery store and buy it from producers through a series of middlemen. The store itself is one of the middlemen, and there are usually others along the way (distribution companies, for example). The labor market is a more abstract sort of market. In this market, businesses who want to consume work pay people to produce labor. In the stock market, consumers and producers buy and sell percentages of ownership of companies.
As you can see, almost everybody is both a producer and a consumer acting in more than one market. If you have a job, you are a producer of labor. Whenever you go shopping, you are a consumer of goods.
Supply and Demand
The ultimate goal of producers is to make money — to bring in more money than they spent producing the product. Consumers may want to satisfy their wants and needs by buying products, or they may buy products in order to make money (by reselling the products or by using the products to produce other products). In any case, consumers generally want to pay as little for goods and services as they can.
In a market, the actions of producers and consumers determine the value of goods and services. Producers are the ones who actually set prices, but they do so based on the behavior of consumers. If nobody buys a product at a particular price, the producer knows the price is too high. If some consumers buy it, but not enough to buy everything produced, producers must either decrease the price or decrease the supply. The willingness of consumers to pay for products is known as demand. Even if there is constant high demand for a product (toilet paper, for example), individual producers need to keep the price down or consumers will just buy it from a competitor.
What Goes Up...
In a growing economy, consumer demand is increasing, overall, more than it is decreasing. Since there is increasing demand, producers want to increase supply. To do this, producers have to increase their consumption of other goods and services, including labor. This means there is greater demand for labor, so the labor pool, on the whole, can raise the price of their product (in other words, people can get paid more for their work).
Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand. In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.
History has proven that an economy will not keep expanding indefinitely — eventually it will contract for a while. A prolonged period of contraction is known as a recession. If the recession lasts long enough, and is particularly severe, it is known as a depression.
...Must Come Down
There are all kinds of things that can change the course of the economy, just as there are all kinds of things that can change the demand for a particular product. In some cases, a recession might be kicked off by over production — a situation in which the supply exceeds the nation’s ability to consume.
One factor that generally plays a role in a recession is the confidence level of the millions of consumers and producers. If consumers stop feeling confident about their job security or the value of their investments, they won’t buy as much stuff. In the current recession, a lot of people who have been laid off are spending as little as possible, and many people who fear they may be laid off are also saving their money.
Just as in an expanding economy, things tend to snowball in a contracting economy. There are thousands of different elements in this downward spiral; you can see the snowballing effect in any number of specific situations.
Fiscal Policy
With fiscal policies, the government influences the economy by changing how it (the government) spends and collects money.
The most common fiscal policy actions in a recession are:
Tax cuts for businesses or for individuals — this gives people and corporations more money, which may make them more likely to buy things, which increases demand.
Increased spending to establish new government jobs — this increases demand for labor, which can lower the unemployment rate.
Automatic fiscal policies, which kick in right away — one of the most important automatic fiscal policies is unemployment insurance. This system provides an income for people who are out of work.
Fiscal policies are dictated by congress and the president.
Monetary Policy
Monetary policy involves manipulating the available money supply in the country. In the United States, monetary policy is conducted by the Federal Reserve System, commonly called the Fed. The Fed is the nation’s central banking institution; it is the bank for the government itself, as well as for national commercial banks. The Fed is also in charge of issuing currency, and it is the main regulating body that oversees bank operations.
The Fed’s power is a double edged sword. While it can be used to nudge the economy out of recession, it can also make things a lot worse. The Fed has to be extremely careful in its actions in order to avoid economic catastrophe.
1. Which of the following items is not the character of economic recession?
Ａ） Slump in personal income.B） People buying less stuff.
C） Decrease in factory production.D） A fast-growing stock market.
2. According to the conventional definition, the economic slow down that can be called a recession has to last for at least ______ months.
Ａ） 6 B） 5 C） 4 D） 3
3. People who want to consume food go to a ______ .
Ａ） labor market B） stock market
C） physical market D） distribution company
4. What do we produce when we act as an employee in a grocery store?
Ａ） Food. B） All kinds of commodities.
C） Labor. D） Percentages of ownership.
5. Which may not be the purpose of a consumer?
Ａ） To satisfy his wants and needs.
B） To make money by selling the products.
C） To make money by using the products to produce other products.
D） To make sure the products are valuable.
6. How do a producer adjust the product price?
Ａ） If nobody buys a product at a particular price, he adjust it higher.
B） If some consumers buy it, but not enough to buy everything produced, producers must increase the price.
C） If some consumers buy it, but not enough to buy everything produced, producers must increase the supply.
D） Even if there is constant high demand for a product individual producers need to keep the price down.
7. We know that in a growing economy, ______________.
Ａ） most consumers and producers won’t do well, but the general feeling about the economy is good
B） consumer demand is increasing, overall, more than it is decreasing
C） although there is increasing demand, producers don’t want to increase supply
D） there is greater demand for labor, but the price of their product may still be low
8. Consumers will buy much stuff when they feel their jobs ______ and investments valuable.
9. Dictating fiscal policies is the job of both congress and______ .
10. Monetary policy includes manipulating ______ in the country.
