Transcript unit 3 powerpoint - Coach Hobbs Blog

Macroeconomics
Essential Questions



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
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

◦ Gross Domestic Product (GDP)
◦ Consumer Price Index (CPI)
◦ Unemployment Rate
Practice EOCT Q:

Which choice describes a
macroeconomic calculation?
a.
b.
c.
d.
Calculating a family’s monthly budget
Calculating a firm’s annual profits
Calculating the unemployment rate
Calculating the interest on a personal loan
Gross Domestic Product

Expressed in $$ terms instead of # of products
◦ Count 15 shirts? Or count 15 shirts x $20 each?

Only value of final goods is used, not value of
inputs
◦ Count bread, but not wheat and flour
◦ Don’t count resales (used cars, real estate)

Only goods/services produced within borders
◦ American or Foreign companies, but not American co
overseas
Cont’d
Durable goods vs. Nondurable goods
 Durable goods are goods that have a
reasonable expectation of lasting more
than 2 years

◦ Automobiles, Tv’s

Nondurable goods are goods that have a
relatively short life span
◦ Food, pencils
GDP, Cont’d
Nominal GDP is NOT adjusted for
increased prices (inflation)
 Real GDP is adjusted for changing prices
 Increase in real GDP=good economic
performance
 Decrease in real GDP=poor economic
performance
 Economic Growth=% change in real GDP
from one year to the next

GDP, Cont’d

Calculating GDP
◦ Most common way is to use the expenditure
approach vs income approach
GDP = C + I + G + Xn
 C = consumer spending

◦ Durable (last long time) + nondurable (short life)
I = investment spending (business spending)
 G = government spending
 Xn = exports – imports (net exports)

Economic Growth
How much has the Real GDP changed
from one time period to the next?
 Expressed in % terms.
 Calculate: Year2-Year1 x100=

Year 1

Practice EOCT Questions:

a.
b.
c.
d.
Which of the following is not included
when calculating GDP?
A refrigerator made in North Carolina
and sold at Best Buy
Nails purchased for construction of a
home
Toyotas made in TN and sold in Mexico
Papa John’s pizza I ate last night
Practice EOCT Q:
Calculate a country’s GDP using the
following statistics:
 Calculate the % the governments portion

◦
◦
◦
◦
Net exports = -$1.5 billion
Gov Expenditures = $ 3.2 billion
Investment Expenditures = $6.4 billion
Consumer Expenditures = $10.8 billion
GDP Practice

Calculate the GDP for a nation with the
following data:
◦
◦
◦
◦
◦

G = $2.1B
I = $3.8 B
C = $16.5B
Exports = $3.5B
Imports = $2.9B
What % of GDP does spending by
individuals account for?
Inflation and CPI
What is happening with prices?
 Inflation rate is needed to find Real GDP
 Calculate the CPI (consumer price index) in order to
calculate the rate of inflation


Inflation = average prices are increasing
◦ Goods and services become too expensive

Deflation = average prices are decreasing
◦ Producers aren’t making as much profit

Stagflation= prices and unemployment are
rising simultaneously
◦ Double economic nightmare as goods cost
more and more people are out of work

Hyperinflation=extreme rise in prices

Inflation affects people’s purchasing power
◦ People on fixed income are hurt most
◦ Workers who receive cost-of-living increases
(COLA’s) aren’t

Measure Inflation rate using the Consumer
Price Index
CPI

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 = 4% Inflation
2010= $1455
 2015= $1600

CPI=
 Inflation Rate=

1960= 710
 2000= 1145

CPI=
 Inflation Rate=

1977= 1035
2015= 1195
CPI=
Inflation Rate=
2013= 1365
 2015= 1360

CPI=
 Inflation Rate=

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:

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
Calculate
Market basket in 2010= 1545
 Market basket in 2011=1610

Unemployment
Rate of unemployment = # of people
looking for work / number of people in
workforce
 Workforce =

◦ Over age 16
◦ Employed or unemployed and…
◦ Actively looking for job within last 30 days
Some people CHOOSE not to work
household production, age, illness, Frustration
Unemployment, cont’d

4 types of unemployment
◦ Frictional
 Left one job and looking for another, changing careers,
◦ Seasonal unemployment
 Unemployed due to seasons, agricultural workers,
construction workers
◦ Structural
 Skills don’t match employers needs, computer skills
◦ Cyclical
 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
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?

1,800,000 are working
 49,000 are looking for work
 22,536 have stopped looking
 Calculate the unemployment rate

EOCT Practice Q:
Sam is a 14 year old looking for a weekend
babysitting job. Is he calculated in the
labor force?
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 (Ups and Downs)
Economic Expansion – time of increasing
employment, income and general
prosperity
 Peak – moment before contraction
 Economic Contraction – dwindling
business activity; unemployment
 Trough – lowest point of contraction,
economy has “bottomed out”


End
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
Two Competing Theories
In order to stabilize a declining economy
1. Supply-side economics

-make it easier for suppliers to supply more,
they have to hire more, more people working
and spending their money, etc
2. Demand-side economics
-increase demand, suppliers want to supply
more and need to hire more, more people
working and spending their money, etc
Fighting Unemployment and Inflation

Fiscal Policy
◦ How the government chooses to tax citizens
and businesses and spend the revenue it raises
◦ Fiscal Policy is set by Congress and the
President
◦ Attempting to manipulate GDP to fight
unemployment and inflation
Fiscal policy
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




Fiscal Policy

Expansionary: Used to expand the
economy (raise employment, lower
prices)
1. Increase federal spending
2. Decrease federal taxes

Contractionary: Used to contract the
economy (slow spending, raise prices)
1. Decrease federal spending
2. Increase federal taxes
Taxes

Impact of taxes
◦ Resource allocation
 Increases costs of inputs, therefore, it causes a decrease in
supply
 Causes prices to go up, leads to less revenue for businesses, and
fewer jobs
◦ Behavior adjustment
 Sin Taxes
 Meant to raise revenues and reduce consumption
◦ Productivity and growth
 If taxes get too high, people loose the incentive to work
harder and be more productive
Taxes cont.

How do we decide who pays taxes?
◦ 2 principles
 Benefit principle of taxation
 Those who benefit from services should pay
 Pay based on how much you use a service
 Ex. Gas taxes
 Ability to pay principle
 People should pay according to their ability, regardless of the
benefits they receive
 Assumes that persons with higher incomes suffer less
discomfort paying taxes than persons with lower incomes
Taxes cont.

Types of taxes
◦ Proportional Tax
 % of tax is the same across the board
 Same impact on everyone
◦ Progressive Tax
 Higher the income, higher the proportion and vice
versa
 Larger impact on people with higher incomes
◦ Regressive Tax
 Larger impact on people with lower incomes
Examples of Taxes
Income Tax: $$ coming out of your
paycheck (Progressive)
 Sales Tax: $$ added on to purchases
(Regressive)
 FICA Tax: $$ taken out of pay for SS
benefits (Proportional)

Government Spending
Spending
◦ Increased tremendously since Great Depression
under the New Deal
◦ Attempt to pull nation out of depression (recover, relief,
reform)
◦ Increased spending in 60’s under Great Society
◦ Attempt to bridge the income gap
◦ Increased in 2000’s
◦ Attack of 9/11 leading to two wars
◦ Recession of 2007
Government Spending cont.

Federal Deficits and the National Debt
◦ Deficit spending
 Spending more than is collected in revenues
 History




Largest deficits in relative terms occurred during WWII
80’s had very large deficits
Decreased throughout the 90’s
Now is very large…how large?
 http://www.babylontoday.com/national_debt_clock.htm
 The government sells bonds to pay for deficit spending
 This continually adds to the National Debt
 All the deficits combined
 Has grown almost continuously since 1900
Government Spending cont.

Negative effects of deficit spending
◦ Crowding Out Effect
 Higher than normal interest rates that heavy government
borrowing causes

Balanced Budget
◦ Neither surplus nor deficit
◦ Difficult
 Wars
 Entitlements
 Broad social programs to provide minimum health, nutritional, and
income level for eligible individuals
Fiscal Policies
◦ 2 Types
 Automatic Stabilizers
 Some tax/spending automatically rise or fall with changes in level of national economic
activity
 For example: when economy suffers and people become unemployed, government
spending for unemployment benefits automatically increases while revenues from sales
taxes fall
 Discretionary fiscal policy
 Taking direct action during an upturn or a downturn
 For example: when economy suffers and Congress enacts legislation to decrease
income tax
Fiscal Policies

Both types have issue with lag time (time
for the policy to take effect), but
Discretionary is worse
1. Recognition Lag = problem has to be
recognized
2. Administrative Lag = members of the
legislative and executive branches of gov must
agree on what spending or tax changes to
adopt
3. Operational Lag = still takes time for those
actions to have an effect on the economy
Expansionary or Contractionary?

The economy is suffering from its worst
slowdown in 30 years. Unemployment
has reached 10%

The annual inflation rate is slowing and
now stands at 2.5%

We have some good news and some bad
news: The unemployment rate has fallen
to the lowest level in a decade, 2.3%. But
inflation has risen to 8%.

The unemployment rate remains steady
at 11%.

The annual inflation rate is 8.5% and
rising.
Money

Money
◦ Before Money
 Barter Economy
 Moneyless economy that relies on trade
◦ What is money?
 Any substance that functions as a medium of exchange
 Generally accepted as payment
 Standard of value
 Place on dollar amount on just about anything
 Store of value
 Goods can be converted into money and stored for long periods of time
Money

Characteristics of money
◦
◦
◦
◦

Portability
Durability
Divisibility
Limited Availability
Gold Standard VS Fiat Standard
◦ Gold Standard
 Monetary standard in which the basic currency is equal to and can be
exchanged for gold.
 Money feels more secure because it can be exchanged for gold
 Prevents the government from printing too much paper currency
 Disadvantage is that a growing economy needs a growing money supply
◦ Fiat Standard
 Money system based on faith
 Use a managed money supply
Monetary Policy
Federal Reserve
 Goal is to help maintain economic
stability
 Established in 1913 after the panic of
1907
 Prior to establishment money supply was
erratic, unstable
 Federal Open Market Committee makes
important decisions

Federal Reserve System

The System
◦ Provides financial services to the
government, regulates financial
institutions, maintains the payments
system, conducts monetary policy
◦ 12 Districts
 Limits power by decentralizing system
 More responsive to local needs
◦ Owned by banks that belong to the
system
 NOT OWNED BY THE
GOVERNMENT!!!
 Receives no federal funding
Federal Reserve System

Structure
◦ Board of Governors
 7 members appointed by president for 14 year terms
 Confirmed by the Senate to staggered terms
 1 new member every 2 years
 One member serves as chairperson
 Currently Janet Yellen
 Board sets policies for the Fed and the member banks
◦ 12 District Banks
◦ Member banks
Federal Reserve System

Structure cont.
◦ 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.
◦ Federal Advisory Council
 12 members appointed by the 12 regional banks
 Offer advise on the overall health of the economy
Federal Reserve System

Responsibilities of the Fed
◦ Mergers
 Regulates bank mergers
◦ Clears Checks








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
 Replaces old currency and stores currency
Challenges
Fighting unemployment and declining
GDP
 Fighting inflation

Tools

Open Market Operations/Often…like breathing
◦ Bonds/securities
◦ Buys and sells

Discount rates/Occasionally…like getting the flu
◦ Rate of interest charged on loans to banks
◦ Raises and lowers

Reserve Requirements/Rarely…like open-heart surgery
◦
◦
◦
◦
Amount banks are required to keep on hand
changes the minimum reserves
Higher=tighter money policy
Lower=easier money policy
Open Market Operations
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
Raise interest rates=less consumer
spending
 Lower interest rates=more consumer
spending

Required Reserve Ratio
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
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 =

◦ Deposit x 1/RRR(Required Reserve Ratio)
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:
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?


Answer: $500 x 1/.10= $5000
Monetary Policy cont.

Summary
◦ Easy Money Policy (Increasing the Money Supply
and Inflation)
 Buy Bonds
 Lower Discount Rate
 Lower Reserve Requirement
◦ Tight Money Policy (Decreasing the Money Supply
and Inflation)
 Sell Bonds
 Raise Discount Rate
 Raise Reserve Requirement
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