Transcript Macro Issues for the GHSGT

Macro Issues
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Gross Domestic Product
Nominal v. Real
Consumer Price Index
Unemployment
Inflation
Fiscal Policy Tools
Monetary Policy Tools
Gross Domestic Product
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Gross Domestic Product is the measure of the final goods and services that
are bought and sold in an economy in a given period
It is measured through adding together consumption, investment,
government purchases, and net exports
C+I+G+X is the formula
Consumption
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Investment
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The spending by business on machinery and changes in inventory
Government Purchases
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The spending by consumers on final goods and services
All purchases made by government, excluding transfer payments
Net Exports
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The difference between imports and exports
Review Questions
"The market value of all final
goods and services produced
within a nation in a given
year." This best describes:
A)Net domestic product
B)Gross domestic product
C)National income
D)Personal income
GDP:
A)includes the value of both market
and non-market transactions
B)corrects for improved product
quality over time
C)corrects for improved productivity
that results in increased leisure time
D)does not include transactions
conducted "off-the-books"
Review Questions
The "G" term in C + Ig + G + Xn
includes all of the following
except:
A)state government purchases of new
computers
B)Social Security checks received by
retirees
C)salaries received by members of the
military
D)local government expenditures for
new school construction
In calculating GDP:
A)both exports and imports are
added
B)neither exports nor imports
are added
C)exports are added and
imports are subtracted
D)imports are added and
exports are subtracted
Nominal vs. Real Numbers
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Nominal are the actual dollar
values computed during the given
time period
Real numbers are computed based
on a “base year’s” dollars
The reason we do this is to get a
better indication of the costs of
products and services and the cost
of living
Consumer Price Index
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The Consumer Price Index is what
we use to measure the cost of
living in the United States
It is a measure of 300 goods and
services that is referred to as a
“market basket”
This is how we measure the
difference between nominal and
real costs
This is also how we measure
inflation
Cost of living allowances are tied
to CPI
Review Questions
Real GDP is found by:
A)adding depreciation to nominal
GDP
B)adjusting nominal GDP by the CPI
C)adding up the dollar value of all
transactions in the economy in a
given year
D)excluding exports and imports from
nominal GDP
Last year nominal GDP increased by
8% while real GDP increased by
10%. From this, we can conclude
that:
A)net investment was positive last year
B)the price level increased last year
C)the price level decreased last year
D)unemployment increased last year
Business Cycle
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Expansion
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Peak
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Negative and shrinking GDP
Trough
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Positive but declining GDP
Recession
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The highest growth of GDP in a
cycle
Contraction
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Positive and expanding GDP
The bottom of a GDP cycle
Recovery
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Negative but increasing GDP
Types of Unemployment
Frictional
Cyclical
Structural
The natural
unemployment
that comes from
individuals
between jobs
The type of
unemployment that
stems from the
changes in the
business cycle
The type of
unemployment
that stems from
changes in the
structure of
industry
Programmer
Six Flags Park
Film Cameras
Inflation
A general rise in the level of
prices
 Demand-Pull
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Consumer demand for a
product “pulls” up the price
Cost-Push
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Wage-Push
Supply Shock
Review Questions
Inflation:
A)reduces both the purchasing power
of the dollar and one's real income
B)reduces the purchasing power of
the dollar and increases one's real
income
C)reduces the purchasing power of
the dollar but may have no impact
on one's real income
D)increases the purchasing power of
the dollar and reduces one's real
income
The war in Iraq sent oil prices
spiraling upwards, resulting in
an increase in the overall
price level. This is an
example of which type of
inflation?
A)Cost-pull
B)Cost-push
C)Demand-pull
D)Demand-push
Does inflation hurt everyone?
Inflation Hurts:
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Savers
Those on fixed incomes
Inflation Helps:
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Debtors
Fiscal Policy
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Control of the money supply through government
policies
Contractionary Fiscal Policy (Tight Money)
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Increase Taxes
Decrease Spending
Expansionary Fiscal Policy (Easy Money)
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Decrease Taxes
Increases Spending
Review Question
An expansionary fiscal policy would call for a:
A)deficit during a period of demand-pull inflation
B)surplus during a period of demand-pull inflation
C)deficit during a recession
D)surplus during a recession
Monetary Policy
Control of the money supply through the Federal Reserve Bank
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Open Market Operation
 Buying and Selling of government securities
Reserve Requirement
 The amount of deposits that banks are required to keep on
hand
Discount Rate
 The interest rate at which the Fed loans money to member
banks
Federal Funds Rate
 The interest rate at which the Fed requires banks to charge
EACH OTHER for loans
Review Questions
The group responsible for setting
policy on buying and selling
government securities (bills, notes,
and bonds) is the:
A)Securities and Exchange
Commission
B)U.S. Treasury Board
C)Federal Open Market Committee
D)12 Federal Reserve Bank president
Other things equal, a dramatic
decrease in the money supply
would:
A)increase the price level
B)reduce the purchasing power of
each dollar
C)increase the purchasing power of
each dollar
D)have an ambiguous impact on the
purchasing power of each dollar
Banks and Creation of Money
There are three types of money identified by the Federal
Reserve:
 M1
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M2
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Most liquid
Currency and checkable deposits
M1 + Near-money savings, small time deposits, Money
Market Mutual Funds
M3
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M2 + Large time deposits
Money Creation and the Fed
Banks create money through
loans
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You make a deposit
The bank has a reserve
requirement
The rest they can lend
By lending the rest, they have
created “new money” that is in
the economy.
Not only is the money still in
your account, but now it is
loaned out to someone else as
well
Review Questions
Money is created when:
A)loans are repaid
B)the net worth of the banking
system is increased
C)banks acquire physical capital
D)banks make additional loans
In which of the following scenarios is
money created?
A)Johnson deposits her $2,000 weekly
pay check at Morton Bank
B)Morton Bank adds to its total
reserves held at the Federal
Reserve Bank
C)Johnson takes out a loan from
Morton Bank to purchase a new
car
D)Johnson repays her car loan