Transcript Macroeconomics

Macroeconomics
Unit 3: Chapters 12-16
Essential Questions
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1) Why & how is economic activity
measured?
2) How do fiscal policy decisions affect
the nation’s economy?
3) How can monetary policy through
interest rates contribute to price stability,
employment and economic growth?
Macroeconomics
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Study of the economics of a nation as a
whole
The big picture
Measuring the “health” of a nation’s
economy
Key economic indicators are used
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Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Unemployment Rate
Practice EOCT Q:
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Which choice describes a macroeconomic
calculation?
a.
b.
c.
d.
Calculating
Calculating
Calculating
Calculating
a family’s monthly budget
a firm’s annual profits
the unemployment rate
the interest on a personal loan
Gross Domestic Product
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Expressed in $$ terms instead of # of products
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Only value of final goods is used, not value of
inputs
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Count 15 shirts? Or count 15 shirts x $20 each?
Count bread, but not wheat and flour
Don’t count resales, except in housing market
Only goods/services produced within borders
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American or Foreign companies, but not American co
overseas
Illegal activities are NOT included
Non-market activities are NOT included ie:stock
market, doing things yourself
GDP, Cont’d
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Nominal GDP is NOT adjusted for
increased prices (inflation)
Real GDP is adjusted for changing prices
Increase in GDP=good economic
performance
Decrease in GDP=poor economic
performance
Economic Growth=% change in real GDP
from one year to the next
GDP, Cont’d
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Calculating GDP
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GDP = C + I + G + Xn
C = consumer spending
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Most common way is to use the expenditure approach
vs income approach
Durable (last long time) + nondurable (short life)
I = investment spending (business spending)
G = government spending
Xn = exports – imports (net exports)
Cont’d
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Durable goods vs. Nondurable goods
Durable goods are goods that have a
reasonable expectation of lasting more
than 2 years
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Automobiles, Tv’s
Nondurable goods are goods that have a
relatively short life span
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Food, pencils
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How these factors affect GDP
Practice EOCT Questions:
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a.
b.
c.
d.
Which of the following is not included
when calculating GDP?
A refrigerator sold at Best Buy
Nails purchased for construction of a
home
Toyotas made in TE and sold in Mexico
Pappa John’s pizza I ate last night
Practice EOCT Q:
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Calculate a country’s GDP using the
following statistics:
Calculate the % the governments portion
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Net exports = -$1.5 billion
Gov Expenditures = $ 3.2 billion
Investment Expenditures = $6.4 billion
Consumer Expenditures = $10.8 billion
Inflation and CPI
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Inflation rate is needed to find Real GDP
Inflation = average prices are increasing
Deflation = average prices are decreasing
Hyperinflation = extreme increase in prices
Inflation affects people’s purchasing power
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People on fixed income are hurt most
Workers who receive cost-of-living increases aren’t
Measure Inflation rate using the Consumer Price
Index
CPI
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CPI is calculated by looking at a base
year’s prices and comparing to current
year’s prices
CPI = cost of today’s market basket
x100
cost of market basket from base year
CPI = 1000 = 1.04 x 100 = 104
960
100 To 104 = %4 increase
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What is inflation?
EOCT Practice Q:
The consumer price index is a measure of
a. Gross domestic product
b. Aggregate supply
c.
Aggregate demand
d. Inflation
Practice EOCT Q:
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a.
b.
c.
d.
When is the benefit for workers to have
a contract with a cost of living
adjustment?
During a recession
During a depression
During an inflationary period
During a strike, or work stoppage
Unemployment
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Rate of unemployment = # of people
looking for work / number of people in
workforce
Workforce =
Over age 16
 Not employed
 Actively looking for job within last 30 days
Some people CHOOSE not to work
household production, age, illness, Frustration
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Unemployment, cont’d
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4 types of unemployment
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Frictional
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Seasonal
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Unemployed due to seasons, agricultural workers,
construction workers
Structural
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Left one job and looking for another, changing careers,
Skills don’t match employers needs, computer skills
Cyclical
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Due to a business cycle contraction, less spending results in
less production resulting in layoffs and closings
EOCT Practice Q:
The government begins funding training
programs to teach computer repair to
unemployed adults. Which kind of
unemployment would this help the
MOST?
a. Frictional
b. Seasonal
c.
Structural
d. Cyclical
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700,000 are working
35,000 have given up looking for work
22,800 are still looking for work
How many people are in the Labor Force?
What is the unemployment rate?
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1,800,000 are working
49,000 are looking for work
Calculate the unemployment rate
EOCT Practice Q:
Sam is a 14 year old looking for a weekend
babysitting job. Is he calculated in the
unemployment rate?
Aggregate Demand and Supply
AD and AS affect GDP, Inflation and Unemployment rates!!
AD = Total amount of goods and services people in an
economy are willing to buy.
AS = Total amount of goods and services that all producers
in an economy are willing to provide
Usually when consumer demand changes, causing prices to
change, producers can respond relatively quickly to
changing prices.
Not so easy for an entire economy.
AD shifts to the left (decrease), results in less being
bought, wide spread price changes take time, products
don’t get sold, producers need to cut production, people
get laid off (bad).
AD/AS Cont’d
Production cuts resulting in layoffs leads to
decrease in GDP.
Decreasing GDP for 6 months or more is a
Recession.
When prices drop to meet equilibrium again,
the economy enters a recovery.
Recession lasting long time and GDP
decrease is severe, economy has entered
Depression.
Business Cycle
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Expansion – time of increasing
employment, income and general
prosperity
Peak – moment before contraction
Contraction – dwindling business activity;
unemployment
Trough – lowest point of contraction,
economy has “bottomed out”
Practice EOCT Q:
If aggregate demand and real GDP are
beginning to fall and the unemployment
rate is beginning to rise, what conclusion
can you draw?
a. The economy is in an expansion phase
b. The economy is facing a slowdown
c.
The economy is in recovery
d. Aggregate supply is increasing
Fiscal Policy
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Government decided to tax/spend
Increase taxes=less consumer disposable
income…less spending…AD
decreases…prices come down…economy
contracts
Decrease taxes=more consumer
disposable income…more spending…AD
increases…economy expands
Fiscal policy
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Governments policies of tax and spend
Raise taxes/lower taxes
Increase gov. spending/decrease gov. spending
Fiscal Conservatives; ie Ronald Reagan, Newt
Gingrich: lower taxes, less spending, “social
needs met by individuals, organizations,
businesses”
Fiscal Liberals; ie Ted Kennedy, FDR: more
active and involved government and willing to
pay higher taxes for it
Taxes
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Congress (legislative branch) passes tax
laws, signed or vetoed by President
(executive branch)
Tax structure:
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progressive (gets higher as higher income),
regressive (sales tax… higher % of income
the lower the income), proportional
Tax Base: Individual income, corporate
income, ss, estate, gift, etc
Deficit vs. Debt
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Budget deficit vs. National debt
Taxes = revenue
Gov must plan a budget, decide what to
spend with taxes collected
When the government spends more than
budget allows, it is running a deficit
That deficit gets added to the national
debt
National debt continues to grow until gov
begins paying it off (and accrues interest)
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Debt Clock
Monetary Policy
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Federal Reserve
Goal is to help maintain economic stability
Established in 1913 after the panic of
1909
Federal Open Market Committee makes
important decisions
Federal Reserve System
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The System
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Provides financial services to the
government, regulates financial
institutions, maintains the
payments system, conducts
monetary policy
12 Districts
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Limits power by decentralizing
system
More responsive to local needs
Owned by banks that belong to
the system
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NOT OWNED BY THE
GOVERNMENT!!!
Receives no federal funding
Federal Reserve System
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Structure
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Board of Governors
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7 members appointed by president for 14 year
terms
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One member serves as chairperson
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Confirmed by the Senate to staggered terms
1 new member every 2 years
Currently Ben Bernanke
Board sets policies for the Fed and the member
banks
Federal Reserve System
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Structure cont.
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Federal Open Market Committee (FOMC)
7 members of the board and 5 districts presidents
who serve 1 year rotating terms
 Meets about 8 times a year
 Make decisions about growth of money supply and
interest rates.
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Federal Advisory Council
12 members appointed by the 12 regional banks
 Offer advise on the overall health of the economy
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Federal Reserve System
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Responsibilities of the Fed
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Mergers
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Clears Checks
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Regulates bank mergers
You write a check to Publix
Publix deposits the check in Publix’s bank
Publix’s bank then place money in Publix’s account
Publix’s bank deposits the check at the Fed
Fed then places money in Publix’s bank
Fed deposits check in your bank
Your bank takes money out of your account and gives it to
the Fed
Your bank then gives you the cancelled check
Currency
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Replaces old currency and stores currency
Challenges
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Fighting unemployment and declining GDP
Fighting inflation
Tools
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Open Market Operations/Often…like breathing
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Discount rates/Occasionally…like getting the flu
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Bonds/securities
Buys and sells
Rate of interest charged on loans to banks
Raises and lowers
Reserve Requirements/Rarely…like open-heart surgery
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Amount banks are required to keep on hand
changes the minimum reserves
Higher=tighter money policy
Lower=easier money policy
Bonds
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Buy bonds=puts money in the system,
increases money supply, consumers have
more cash, spend more, helps to raise
GDP
Sell bonds=takes money out of the
system, decreases money supply,
consumers have less cash, helps slow GDP
Discount Rate
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Raise interest rates=less consumer
spending
Lower interest rates=more consumer
spending
Required Reserve Ratio
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Raise reserves=less money for banks to
loan out, interest rates go up, less
consumer spending
Lower reserves=more money banks can
loan out, interest rates go down, more
consumer spending
Money Creation
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Money Multiplier Effect = money being
created in the economic system
Money is not created by printing, but by
banks doing their business…lending
Money Multiplier Formula =
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Deposit x 1/RRR(Required Reserve Ratio)
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Suzy deposits $1000 in her checking acct.
RRR = 10%
$900 is loaned to Julie who gives it to
John for a car
John deposits $900
10% RRR
$810 is loaned to Sam
Total money supply is:
$1000+$900+$810=$2710 (MME!)
Calculate the MME:
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You deposit $500 and the RRR is 10%
If the bank loans out all the money, how
much money is put into the money
supply?
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Answer: $500 x 1/.10= $5000
Monetary Policy cont.
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Summary
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Easy Money Policy (Increasing the Money
Supply and Inflation)
Buy Bonds
 Lower Discount Rate
 Lower Reserve Requirement
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Tight Money Policy (Decreasing the Money
Supply and Inflation)
Sell Bonds
 Raise Discount Rate
 Raise Reserve Requirement
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EOCT Practice Q’s
1. Which of the following is responsible for
the monetary policy of the U.S.?
A. Congress
B. The President
C. The Senate
D. The Federal Reserve System
2. When the Fed sells government securities, or
bonds, on the open market, what effect does
this action have on the economy?
 A. increases money supply; increases consumer
demand
 Increases money supply; reduces inflation risk
 Decreases money supply; increases consumer
demand
 Decreases money supply; reduces inflation risk
3.
a.
b.
c.
d.
If GDP is decreasing and the
unemployment rate is increasing, which
fiscal policy would the government MOST
likely use?
Increase taxes
Decrease taxes
Increase bank reserves
Decrease spending
4. If the inflation rate is rising too fast,
which fiscal policy would make the MOST
sense?
a. Increase taxes
b. Decrease taxes
c.
Increase spending
d. Decrease bank reserves