Transcript Unit 4

Unit 4
Macroeconomics:
Policies
Ch 13 – Economic Performance
Ch 14 – Economic Instability
Ch 15 – The Fed and Monetary Policy
Ch 16 – Achieving Economic Stability
Ch 13 – Economic Performance
• GDP (Gross
• The ___________ of all final goods + services produced
Domestic Product) w/in a country’s borders in a year. USED TO
___________________________.
• It’s the most important measure of an economy’s
_________________.
• _______ companies operating w/in the US are included
in the GDP; however, ________ companies operating in
other counties are NOT included.
• In 2008, the GDP of the US was over _____________.
• What is excluded?
• _________________ (a baker buys flour to bake
a pie – but only the pie is added in the GDP to
avoid counting the flour twice)
• _______________________ (like homemakers)
• ________________ (like used cars + homes b/c
nothing new was created)
• ____________________ (illegal activities)
• Economic
sectors
(Different parts of
the economy)
• _______________ sector: individuals/families
• ___________ sector
• Represented by a “C”
• _________ sector: businesses (including sole
proprietorships, partnerships + corporations)
• It’s responsible for bringing together the
_________________ to produce output
• Represented by an “I”
• ____________ sector: local, state, + national
• Represented by a “G”
• ___________ sector: The exchange of
goods/services b/w nations
• Represented by “(X-M)” (exports – imports)
• How do we
determine
GDP?
• By determining how much each
sector ______ on goods/services, we
can determine the GDP. So:
GDP = _______________
• GNP (Gross • The dollar amount of all final goods +
National
services produced w/ labor + property
Product)
supplied by a country’s ___________.
USED TO MEASURE ____________.
• Usually very close to a nation’s GDP.
• ________ goods + services produced
w/ labor + property supplied by
___________ in the US.
End Section 1
• Determining
inflation
• Inflation is the
in the general __________.
• To determine the rate of inflation, economists
create a price index (a series of prices
________________ to measure the change in
price).
• To create a price index, you must have a base
year (the year to which all other years’ prices
are compared to) + a market basket (a
representative selection of _____________
__________ goods/services). The price of the
market basket is compared over a series of
time to the base year which shows how prices
have __________.
• Real vs.
Current GDP
• To compare GDP over time,
economists need to know what
increases in GDP are due to
increases in __________/income +
what are just do to ___________.
• Current GDP is the GDP when it is
_______ adjusted for inflation.
• When ____________ from inflation
have been removed, it is called the
real GDP.
End Section 2
• GDP +
population
• Another factor which can _____ GDP
data besides inflation is ________. If
the population is
at a faster rate
than the GDP is, on average
individuals aren’t ________ as much.
• GDP per capita is the measurement
of the output __________ (it is NOT a
measurement of ___________).
• In 2008, the GDP per capita of the US
was $__________.
• Other
important
population
factors in the
economy:
• Overall ____________ growth
• ________________ change (people are
born, die, + move – not in that order)
• Fertility rate (the number of births that
_____ women are expected to undergo
in their lifetime)
• Net _________ (includes those coming
+ going)
• Age –
• median (average)
• the _______________ (number of
children + elderly for every 100
people 16-64 – currently around
65:100)
• __________
• ________
End Section 3
• Benefits of
economic
growth:
• It
standard of living (quality of life
based on _____________).
• It
gov.’t spending to provide more
__________.
• It
___________________ as fewer
people are poor +/or unemployed
• Can provide more help for _________
nations.
• Turns us into a global ____________.
• Factors
influencing
economic
growth
• Same as the original factors of production:
• Land, _______, labor, + _____________
• Examples of things that would improve
economic growth:
• _____ – more oil is discovered in Texas
• ______ – a cheaper way to build cars is
discovered + $ is reinvested in the
company for further developments
• _______ – the population
OR could
result from an increase in a population’s
education/training
• Entrepreneurs – tend to flourish in areas
w/ minimum gov.’t ______________
• Businesses want to
productivity (the
_________ use of inputs - referring to capital +
labor - to create goods/services). This leads
to economic growth.
End Section 4
Ch 14 – Economic Instability
• Business
cycles
• Largely systematic ups + downs of _________.
• It has 2 phases: a recession is a period during
which real GDP ______ for 2 quarters in a row
(1 quarter = 3 months) + an expansion is a
period of __________ from a recession.
• When the a recession reaches its _____ point,
the trough, the period of expansion begins +
when a period of expansion reaches its _____
point, the peak, the recession begins.
• If a recession becomes _____ enough, it turns
into a depression – a state of the economy w/
large numbers of __________, shortages, + an
______________ in manufacturing plants.
or Recession
• Causes of the • There is no one theory, but there are several factors
business cycle
working together which can help explain changes in the
business cycle:
• ____________________: When the economy is
expanding, businesses buy more capital goods
(goods used to make __________ goods). When
they’ve expanded enough, they stop buying
capital goods, causing a loss of _______ for the
makers of those goods leading to a recession.
• _____________________: Businesses hold on to
more inventory when the economy is expanding +
cut back during a recession.
• ________ + imitation: When a company creates a
new product or discovers a more ________ way of
doing business, sales go up + the economy
expands. Other businesses then follow. Later,
there is a slump + economic activity slows.
• _______________: The FED lowers interest rates
during a recession to encourage _________ +
investments, as the economy improves, interest
rates are __________.
• _________________: Outside influences (such as
drastic changes in the oil market).
• The Great • During 1920s, US economy appeared to be
Depression
booming; however, it had flaws:
1. Uneven ___________________ (Wealthiest
5% received 33% of income in 1929)
• Many were too _____ to buy much of the
goods being produced.
2. _______________
• Because many goods weren’t being sold,
factories began _____________ workers.
• Fewer people could buy goods, led
to a downward spiral.
• _______ were also overproducing w/ help
of new scientific methods + machinery
(also face
world competition).
• Couldn’t pay off loans + weakened
________ .
Farm Foreclosure Rate
(1920-1930)
•
Stock
Market
Crashes
•
•
_________, NYC was the financial capital of the
world.
Stock prices had _________.
• By Sept. 1929, some people began to
think ___________ were unnaturally
+
would soon , so they started to sell their
stocks until the stock market __________.
• Everyone was selling + no one was
buying.
• “______________” – Tues. Oct. 29,
1929, the market crashed.
Crowd gathering on Wall
Street after the 1929
crash.
• The Great
Depression
• Stocks were worthless + many people
were living in __________.
• Unemployment
as production,
prices, + wages
.
• Thousands of _________ failed.
• _____ closed + 9 mil people lost
their ______ when banks had no
$.
• Many _______ lost their land b/c
they couldn’t pay their mortgage.
• By 1933, ¼ of American workers
were ________________.
• This prolonged business
slump was The Great
Depression.
• American banks began demanding
repayment of their ________________ +
American investors withdrew $ from
_________.
• Congress placed _________ on imported
goods (so people would buy American
goods).
• Other countries did the same +
Collapse of World Trade Following
______________
65%.
Smoot-Hawley Tariff of 1930
• Set off a world wide
___________ felt especially
hard in Germany + Austria
(due to war debts +
dependence on American
loans).
• The Great Depression didn’t
end until __________.
End Section 1
• Unemployment •
•
•
The unemployed are people ________ for
work who make a specific ___________ a
job during the past month + worked less
than 1 hr for pay or profit in the last week.
The unemployment rate is the # of
unemployed individuals divided by the total
# of people in the civilian _____________.
• The unemployment rate tends to
dramatically during ________ + then
come down slowly afterward.
The unemployment rate ______________
employment conditions for 2 reasons:
1. It doesn’t count those who are too
_______________ to look for work.
2. It doesn’t count those who are
working _______ even if they wish to
gain full-time employment.
• Types of
unemployment
• Frictional – caused by workers who are in b/w
jobs. It is ___________ + inevitable as people
change jobs frequently.
• Structural – occurs when a fundamental
change in the operations of the economy
_______ the demand for workers + their skills.
(Ex. Changing from a manufacturing economy
to one based on computer technology). This
is a much more serious type of unemployment
+ can require a long period of ____________.
• Cyclical – occurs due to changes in the
__________________.
• Seasonal – occurs due to changes in the
_______ or changes in the demand for certain
________ (Ex. Construction workers).
• Technological – occurs when workers are
replaced by _______ or other technology (Ex.
ATMs replacing many bank tellers).
End Section 2
• Determining
inflation
• Inflation is the
in the general price level.
• To determine the rate of inflation, economists
(From last chapter)
create a price index (a series of prices
compared over time to measure the change in
price).
• To create a price index, you must have a base
year (the year to which all other years’ prices
are compared to) + a market basket (a
representative selection of commonly
purchased goods/services). The price of the
market basket is compared over a series of
time to the base year which shows how prices
have changed.
• Patterns of • Inflation tends to
faster during ___________
inflation
periods of the business cycle +
during
____________.
• Deflation (a
in the general price level –
opposite of inflation) occurs only very ________.
• In the US, deflation has occurred only after
WWI + again during the ______________.
• Causes of
inflation
• The _________________: all sectors of the
economy try to buy more goods + services
than the economy can produce causing
__________ +
prices.
• Another explanation blames the federal
gov.’t’s ________________ (similar to the
demand-pull theory).
• A 3rd explanation blames the rising cost of
______ (including labor wages) which forces
manufacturers to prices.
• A 4th explanation says inflation is caused by
a ____________________ of wage + price
increases that is hard to stop.
• The most popular explanation is excessive
_________ growth. This happens when the
gov.’t increases the $ supply faster than the
growth of ___________. In other words, the
amount of $ in circulation is increasing more
than the amount of __________________.
• Consequences
of inflation
• The dollar buys ________.
• Particularly difficult for people
living on a _____________ (like
retired people).
• It changes spending habits which
disrupts the ___________ (ex. Fewer
people may be able to buy things like
cars – causing some businesses to
_____________).
• It alters the distribution of ________ +
during long inflationary periods, it
hurts ________ more than borrowers.
End Section 3
• Distribution
of income
• Reasons for income inequality:
• _____________
• Wealth (inherited or saved)
• Discrimination
• __________
• ____________________ (some
groups/professions may control who or
how many enter it)
• Reasons why the __________ is growing (the
rich are getting richer + the poor are getting
poorer):
• ________________ from a goods based
economy to a service based economy
(services can be worth a lot or very little)
• Growing gap in ______________
• Declining _________ to negotiate wages
• Increasing # of _____________ families
• Antipoverty
programs
• Welfare – economic + ________ programs that
provide regular assistance from the gov.’t or
private agencies b/c of ________.
• ___________ assistance – direct cash
assistance
• __________ assistance – non-cash
assistance (Ex. food stamps, Medicaid)
• ______________ programs – vary from
state to state (include things like foster
care, job training, family planning, etc…)
• _____________
• Enterprise zones – areas where
companies can locate free of some ____
laws (intended to help bring _______ to
needy areas)
• Workfare programs – requires those
receiving ______ to provide some _____
in exchange (usually community service)
End Section 4
Ch 15 – The Fed and Monetary Policy
• The Federal
Reserve System
(“The Fed”)
• Created in 1913 to act as the ______
_______ of the US.
• What does it do?
• Provides ________________ to
the gov.’t
• _________ financial institutions
• Maintains the payments system
• Enforces consumer _________
laws
• Conducts _________________
• Structure
of the Fed
• It’s privately owned by its member banks
(commercial banks that are members of, + hold
________ in the Fed).
• Individual banks may or may not belong to the Fed.
Ben Bernanke
Chairman of the Fed
• The Board of Governors sets the _________
_________ for the Fed + its member banks to
follow, conducts some aspects of monetary
policy, + makes a report each year to
____________.
• The Board has 7 members appointed by
the ________ + confirmed by the _____.
They serve 14 yr terms that are
staggered w/ a new member being
appointed every ________.
• The Chairman of the Fed is one of the 7
Governors who reports to Congress twice a
year.
• 12 Federal Reserve District Banks serve the
same function for member banks that those
banks serve for the ______ (loaning $, holding
deposits, etc…).
• Regulatory
• Regulates + monitors the $ its
responsibilities members hold in __________.
• Serves as a responsible
banking practice + to control
the ________________.
• Supervises + regulates ________
________ w/in the US + the
international operations of US
member banks.
• Has other regulatory responsibilities
as well…
• Other
services
• ___________________
• The District Federal Reserve System Bank
takes $ from the account of the person
who’s written the check + transferring it into
the bank of the person who’s cashed the
check.
• Enforcing __________________
• Requires lenders to explain purchases
made on credit – ex. down payment, the # +
size of monthly payments, + the total
amount of interest paid over the life of the
loan, etc…
• ______________ currency + coins
• Puts new $ into circulation + destroys
mutilated currency.
• Providing ______________ to the gov.’t
• Serves as the federal gov.’t’s bank – ex.
maintains accounts for the IRS.
End Section 1
• Monetary policy
• The expansion or contraction of the $ supply in
order to influence the cost + the availability of
________ (including loans).
• The fractional reserve system requires banks
to keep a fraction of their deposits in their
banks.
• The legal reserves are the $ that the
banks hold in their _______ + at the
Federal Reserve district banks.
• The reserve requirement is the rule that
says what percentage of every _______
must be set aside as legal reserves.
• It is usually around _____%.
• Excess reserves are any extra $ a bank
has over the reserve requirement + may
be __________________ by the bank.
• This $ is either invested or
loaned out + banks make a ____
from the interest on those loans.
• Major tools of
the monetary
policy
1. __________________________
- The Fed is usually reluctant to
use this tool b/c the others tend
to work better.
2. Open Market Operations buying/selling of gov.’t ____________
(stocks + bonds).
- The most ______________ tool.
3. Discount Rate – the interest the Fed
charges on ________ to financial
institutions.
- They take out loans to cover a
higher # of seasonal loans to their
customers or to cover a ________
in their reserve requirements.
• How these tools are used depends on
whether the Fed is operating under a
_____ money policy or a _____ money
policy.
• Easy $ policy
• the Fed wants to ________ the economy by
encouraging people to spend, invest, + take
out loans.
• Reserve requirements – to _________
spending, investing, + loaning, the
Fed would
the reserve requirement
so more $ would be out in circulation.
• Open market operations – to put more
$ in circulation the Fed _______
securities.
• Discount rate – is
to ___________
financial institutions to take out loans
(so that they can loan more $ to their
customers + put more $ in circulation).
• Tight $ policy
• the Fed wants to ______ the $ in circulation
– to help prevent _______ – by discouraging
spending, investing, + loans.
• Reserve requirements – to _________
spending, investing, + loaning, the
Fed would
the reserve requirement
so less $ would be out in circulation.
• Open market operations – to
$ in
circulation the Fed ______ securities.
• Discount rate – is
to ___________
financial institutions from taking out
loans (so that they can loan less $ to
their customers, so that less $ is in
circulation).
• Moral
suasion
• The use of _____________ (such as
announcements, press releases,
articles, + ____________ before
Congress).
• A ______ monetary policy tool of
the Fed’s.
• Bankers try to ______ what the Fed is
preparing to do w/ the monetary
policy + will often react based on
____________________ by the Fed.
End Section 2
• Impact of
monetary policy
• Short-term – affects ___________ (the price of
credit).
• Long-term – affects the general level of ______.
• Having too much $ in circulation leads to
___________.
• Known as the Quantity Theory of $.
• Other monetary
policy issues
• ________ – effects of changes in the monetary
policy can take months or years to be felt.
Makes it _____________ how well it’s working.
• Burden – may affect some ________ more than
others (especially those sensitive to the need
for loans like cars + houses).
• ________ spending habits – if people take out
more loans today they’ll have less $ to spend in
the future. Also, expectations of future ______
lead to people spending more $ now.
End Section 3
Ch 16 – Achieving Economic Stability
• Economic
instability
• Can take the form of a __________,
high ______________, +/or inflation.
• Stagflation is a period of _______ (no
growth) economic growth combined
w/ __________.
• Costs of economic instability include:
loss of __________ (leading to a loss
of tax $), uncertainty among
producers + consumers, wasted
_________, political instability, higher
crime rates, etc…
End Section 1
• Macroeconomic • Aggregate supply is the ________ of goods
equilibrium
+ services that all firms would produce in a
specific period of time at various price
levels.
• If the period was exactly 1 yr, + if production took
place w/in a country’s borders, then aggregate
supply would be the same as GDP.
• Aggregate demand is the ____________ of
goods + services demanded at different
price levels.
• Macroeconomic equilibrium is the level of
real GDP consistent w/ a given price level.
In other words, it is where total production +
demand are at the _____________.
• On a graph, it is where aggregate
supply + aggregate demand _______.
End Section 2
• Achieving
economic
stability:
demand-side
policies
• Federal policies designed to
or
total
__________ in the economy.
• Fiscal policy – the gov.’t’s attempt to
______ the economy through taxing
+ gov.’t spending.
• Ex: In a recession, the gov.’t
would need to spend more $
to __________ the economy.
• Automatic stabilizers are
programs that automatically
trigger _______ if changes in
the economy threaten
___________.
- Ex. Unemployment
insurance, Entitlement
programs (like welfare),
+ the income tax.
• Achieving
economic
stability:
supply-side
economics
• Policies designed to stimulate output +
lower unemployment by
__________
instead of demand.
• Also known as “Reaganomics” or the
“__________ theory” – benefits that start
w/ companies lead to greater profits +
more jobs, so the benefits trickle down to
_____________.
• The gov.’t’s role is much _______.
•
the # of gov.’t agencies
• _____________ – fewer
regulations promote
production.
•
________ – especially on
businesses.
• Supply-side economics tend to promote
economic ________ more than stability.
• Achieving
economic
stability:
monetary
policies
• Focuses on __________ the economy by
controlling the $ supply – this is what we
covered earlier w/ the Fed in Ch 15.
• This method is often favored b/c both
demand + supply-side economics can be
difficult to enact due to _______________ in
Congress.
End Section 3
• Fiscal policy
• (The gov.’t’s attempt to stabilize the economy
through taxing + gov.’t spending) It involves
planning a _______ that has either surpluses
or deficits that are intended to maintain a
steady level of ___________ in the economy.
• 3 types:
• _____________ – policy that someone
must CHOOSE to implement.
• __________ – does not require new or
special action to go into effect (ex.
unemployment, social security, etc…).
• __________ – plans + programs put in
operation to strengthen the economy in
the ________ (ex. Health care, banking
laws, etc…).
• Reasons for
•
differing opinions
among
economists
•
Different ________ about what is
____________ (one might believe
unemployment is the more important
problem while another might say
inflation, etc…).
Different times – economists, like all
people, are shaped by the ______
_________ they grew up in.
End Section 4