The Economics Web Newsletter is for use as a tool when teaching the principles of economics. It specifically references the Wall Street Journal editions of selected McGraw-Hill Principles of Economics texts. Do You Remember presents five or more quick factual questions and answers covering several articles that have appeared in the Wall Street Journal in the week preceding the newsletter. They make good in-class quizzes when reading the Wall Street Journal is required. Article Analysis reprints one article from the Wall Street Journal and poses five or more analytical questions and their answers with references to text chapters.

1. What is the term coined by the CEO of Novell in 1996 to describe rival firms collaborating with their "enemies"? Click for answer.
2. What historic business cycle event occurred last week? Click for answer.
3. To what do analysts attribute the productivity surge since 1995 (productivity has risen by 2.6 percent per year since 1995 compared to only 1.4 percent from 1974 to 1995)? Click for answer.
4. By how much did GDP change in the fourth quarter of 1999? (a) it declined by 1.8 percent, (b) it rose by 1.8 percent, (c) it declined by 5.8 percent, (d) it rose by 5.8 percent. Click for answer.
5. What unusual sales tactic is Varistybooks.com using to increase its sales of college textbooks through the Internet? Click for answer.
6. How have capital markets possibly helped keep the current expansion going? Click for answer.
7. Which rose more in 1999—spending or personal income? Click for answer.
8. Does America’s 107-month expansion set a world-record for the longest economic expansion? Click for answer.
9. Name one cause for the ending of previous expansions. Click for answer.
10. What market is the steel industry looking to expand into? (Hint: they want to replace lumber as an input to this product.) Click for answer.
11. What news from the National Association of Purchasing Managers may make it more likely that Fed officials will raise interest rates? Click for answer.
12. Reducing the national debt is adversely affecting some people. Name some of those people. Click for answer.
13. What action by the Fed was taken last week? Click for answer.
14. BP Amoco has proposed to acquire Atlantic Richfield, Co, both oil producers. What is the Federal Trade Commission’s opinion about the acquisition with regards to how it will affect the competitiveness of the oil market? Click for answer.
15. Instantly recognizable Internet domain names are scarce and valuable. A small semiconductor company bought its domain name in 1992, but found out that people didn’t associate the domain name with semiconductors. Instead of attracting interested engineers, it was attracting people interested in Puff Daddy CDs. What is that domain name? (It was offered $1 million for the domain name by another firm.) Click for answer.

1. Co-opetition. Many technology firms are collaborating and/or supplying to rival firms in an attempt to increase the market more quickly. One theory has it that firms co-operate as markets develop and compete to divide the market once it is established. (See "More Companies Cut Risk by Collaborating with Their Enemies" January 31, page A1.)
2. The economy completed its 107^th month of economic expansion—the longest economic expansion in U.S. history. (See "Economic Expansion Poised to Set Record, But Exactly When?" January 31, page A13.)
3. Analysts point to business investment in computers, software and other technological products. (See "Technology Spurs Economic Expansion" January 31, page A2.)
4. GDP rose at a 5.8 percent annual rate in the fourth quarter of 1999. (See "GDP Grew at an Annual Rte of 5.8% in Fourth Period, Surpassing Estimates," January 31, page A2.)
5. It is hiring college students to sell textbooks to their classmates. (See "Marketers on Campus: A New Bag of Tricks," January 31, page B1.)
6. More sophisticated capital markets have spread the risk of fluctuations in individual industries lowering the probability that a slump in one industry will bring the entire economy to a halt. (See "Why the Long Boom? It Owes a Big Debt to the Capital Markets," February 1, page A1.)
7. Personal income rose 5.9% in 1999 while spending rose 7%. To read the full report go to http://www.doc.gov. (See "Rate at Which Consumers Save Sinks to a Record," February 1, page A2.)
8. No. Japan had a 20-year expansion beginning in the 1950s and Chile had a 16-year expansion beginning in 1983. (See "In Asia, Europe, Latin America, Duration of Expansions Puts Latest U.S. Boom in the Shade" February 1, page B1.)
9. Inflation, oil price shocks, war, overly tight monetary policy, deficit spending prompting Fed to raise rates, inflation prompting Fed to raise rates. (See "The Power Brokers, the Plutocrats and the Prognosticators" and "A Century of Booms, and How They Ended," February 1, page B1.)
10. Steelmakers are trying to get homebuilders to use steel instead of lumber to build houses. This is attractive to homebuilders who have faced rising lumber costs and attractive to steel manufacturers who have faced competition from cheap imported steel. (See "Steelmakers Want Bigger Housing Cut," February 2, page A2.)
11. The prices index from the NAPM survey rose to 72.6 in January. The overall NAPM index stood at 56.3—a level over 50 indicates expansion. For the full release go to http://www.napm.org/ (See "Manufacturers Remained Busy in January," February 2, A2)
12. Since the national debt is being reduced, the Treasury is reducing the number of government auctions and the market for T-bills and bonds is shrinking. This has reduced employment among bond traders, has cut one place conservative investors can put their money, and eliminated the job of John Mitchell who drove the "National Debt Clock" truck around the country. (See "Cutting National Debt Sounds Cool but Upsets Some Well-Laid Plans" February 3, A1)
13. The Fed raised the Fed funds rate by a quarter of a percentage point. The Fed also raised the discount rate to 5.25 percent. The Fed’s home page is at http://www.federalreserve.com/. (See "Fed Raises Its Main Interest Rate," February 3, A2)
14. The FTC is seeking to block the acquisition on antitrust grounds. It believes the acquisition will allow the BP to control oil production in Alaska’s North Slope and affect world oil prices. (See "FTC to Seek Bar to Deal of BP, Arco," February 3, A3)
15. The domain name, registered in 1992 to Multi-User Specialty Integrated Circuits is MUSIC.COM. (See "How Music.com Found Itself a Hot Address," February 3, B1)

By JACOB SCHLESINGER and NICHOLAS KULISH
Staff Reporters of THE WALL STREET JOURNAL

1. Define the business cycle. What stage of the business cycle is the U.S. economy currently in?

It wasn't. Although the boom of the 1960s lasted longer than each of the prior expansions since 1854 -- the first year covered by the National Bureau of Economic Research's official business cycle history -- it, too, faded into recession or worse.



Virtually every U.S. expansion since World War II has ended with the same script: Inflation picked up, the Fed cracked down, and the economy fell into recession. The longer growth lasts, the more likely cost pressures build. Falling unemployment forces companies to offer higher wages and pass on costs to customers. Supply shortages may emerge and factories may struggle to keep up with demand, allowing sellers to hike prices.

At the end of the '60s boom, the consumer-price index was rising at an annual rate of 6.2%. At the end of the '80s boom, inflation crossed 5%.

2. Why might inflation be a harbinger of an impending recession?

3. How have recent increases in productivity kept inflation down?

The expansion and diversification of financial markets have also extended the boom, by creating trillions of dollars of new wealth and spreading it widely among consumers. And America's growing reliance on capital markets to finance companies has made the allocation of funds more efficient.

The ability of manufacturers to manage inventories more skillfully has made the current expansion more even-keeled. In the past, companies during good times built up huge stockpiles in anticipation of growing demand. If demand fell, production plunged to work off excess inventories, accelerating a downward spiral. Thanks to just-in-time production methods and more sophisticated market-monitoring techniques, inventories remain slim by historical standards. Last year, the Big Three auto makers kept enough extra cars on lots to meet just 64 days worth of demand -- down from 77 days a decade earlier.

4. How have improvements in inventory management reduced the risk of recession? Has it also affected expansions? If so, how?

5. How can low unemployment lead to inflation? And then a recession?

The stock market's surge is another source of concern, with share prices well above what any of the old formulas could justify based upon earnings, dividend payments, interest rates. The Standard & Poor's 500-stock index was trading at 31 times earnings at the end of last year, double the average rate for the past 40 years. Internet superstar Yahoo! hit a whopping price/earnings ratio of 735. The 1920s saw a similar bidding up of shares, particularly in new technologies -- one of the hot themes then was radio. Then, as now, investors borrowed heavily to buy stocks, and borrowed heavily against their market-driven wealth.

6. How is the U.S. trade deficit related to our increasing reliance on foreign capital and the possibility of a recession instigated by decisions by foreign investors?

In the past, relatively minor setbacks often became calamities because of policy blunders. The 1929 "great crash"" became the "Great Depression," in part because the Fed kept the money supply tight even as the economy was contracting, and President Herbert Hoover raised taxes to balance the budget. Inflation got out of hand in the '60s and '80s because the Fed had been too loose with money supply, and because Lyndon Johnson and Ronald Reagan spent beyond their administrations' means.

Today, the government looks better poised to handle an incipient downturn. For the first time in modern economic history, fiscal policy is being run the way the textbooks say it should be during good times: The government's big budget surpluses help damp growth and prevent the economy from overheating.

The surpluses also give President Clinton and his successors more room to stimulate the economy with spending increases or tax cuts should conditions soften. "We've reloaded the fiscal cannon," as Treasury Secretary Lawrence Summers puts it.

The Fed, meanwhile, is more vigilant than ever about pre-empting inflation before it gets out of hand, and quicker to ease up when the economy looks weak. That's why Mr. Greenspan is raising interest rates now, and why he was quick to cut rates after the 1987 stock market crash and during the 1998 Asian crisis.

"We can't smooth out every shock, but I feel confident that the Federal Reserve can basically keep us close to a fairly steady path," says Christina Romer, an economic historian at the University of California at Berkeley. "We've entered an era where, if policy makers stick to the consensus among economists, we won't have as many cycles."

Yet for the government to act wisely, it has to be able to forecast accurately, a skill that hasn't yet been perfected. Even Mr. Greenspan has sometimes called things wrong. In October 1990, he told his Fed colleagues that "the economy has not yet slipped into recession" -- even though it was later determined that the downturn had started three months earlier.

7. What is required of government to be able to reduce business cycles in the economy?

1. A business cycle is the fluctuations of real output around the growth trend. The parts of the business cycle include the downturn (recession) and the upturn (expansion). The economy is currently in an expansion. Return to article.
2. As the article mentions, nearly every expansion ends with increasing inflation. Inflation, therefore can be thought as a harbinger of a recession. The cause of the recessions, however, have mostly been due to the Federal Reserve’s reaction to inflation—to reduce the money supply. Reducing the money supply shifts the aggregate demand curve to the left and output declines. Return to article
3. The U.S. economy has experienced an accelerated increase in productivity. This keeps inflation down by reducing per unit costs of production. If productivity is rising by 2.5 percent a year, firms can increase wages to employees by 2.5 percent per year without raising product prices and still turn a profit. If, however, wages increase by more than productivity increases, per unit costs will rise and firms will eventually raise product prices. If this is ongoing, inflation will result. In terms of the AS/AD framework, increases in productivity lead to shifts in the AS curve to the right. As the AS curve shifts, inflation falls. Return to the article.
4. Improvements in technology—specifically the computer—have improved the ability of firms to manage their inventories. The term used to describe inventory management today is just-in-time inventory. This has reduced fluctuations in inventory levels. Since inventory is a component of aggregate demand, this has also reduced fluctuations in the business cycle. This means that recessions and expansions are more muted (other things equal). Return to article.
5. One trouble spot for the expansion is low unemployment. Low unemployment means that the economy may be coming up against capacity constraints. If aggregate demand exceeds aggregate supply, firms will begin to compete harder for the limited supply of labor. Firms, wanting to meet increases in demand for their products, will offer higher wages to lure workers away from other firms. As they do this, their costs will rise. If all firms face this constraint, product prices will rise and inflation will result. Return to article.
6. A deficit on the current account (greater imports than exports) must be offset by an equal surplus on the capital account. That is how Americans are paying to consume more than they are producing. This means, however, that foreigners are investing more in the United States. If foreigners lose confidence in the U.S. economy, they may reduce their holdings of U.S. assets. Falling asset prices might push the economy into recession. Return to article.
7. To smooth out recessions, the government must react correctly to the business cycle—slowing the economy when it grows beyond capacity to avoid inflation and accelerating the economy when it slips below capacity to avoid recession. It must be very wise in instituting correct policies. It also must be able to forecast the economy because many of its policies are either implemented with delays (it takes time to pass bills through Congress) or have effects after many months (monetary policy affects the economy with a lag). Return to article.

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