Page 85 - Business Principles and Management
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Unit 1
FIGURE 3-6 Purchasing power is inversely related to CPI. Inflation has
reduced the purchasing power of a dollar over time.
1
1
0.77
0.8
0.67
0.61
0.6 0.56
0.5
0.4
0.2
0
1983 1990 1994 1998 2002 2006
Source: Statistical Abstract of the United States, 2006
What are some of the indica- CORRECTING ECONOMIC PROBLEMS
tors that an economy may be Most industrialized nations experience business cycles, a pattern of irregular but
heading for a recession?
repeated expansion and contraction of the GDP. Business cycles, on average, last
about five years and pass through four phases, as shown in Figure 3-7. These
four phases—expansion, peak, contraction,
and trough—can vary in length and in in-
tensity, with many lasting only a few years.
Some, however, can be severe. When statis-
tics show that the economy may be about
to enter a recessionary period (a contraction)
or an inflationary period (an expansion), the
government can take certain actions. Several
specific devices used include controlling taxes,
regulating government expenditures, and
adjusting interest rates.
PHOTO: © GETTY IMAGES/PHOTODISC. to slow growth and lowered to encourage
One way to control economic growth
is to raise or lower taxes. Taxes are raised
growth. When taxes are raised, there is
less money to spend, which discourages
economic growth. When taxes are lowered,
people and businesses have more money
to spend, which encourages economic
72 growth.
