Understanding Macroeconomic Concepts

1. Unit 4 Macroeconomics: Policies Ch 13 – Economic Performance Ch 14 – Economic Instability Ch 15 – The Fed and Monetary Policy Ch 16 – Achieving Economic Stability

2. GDP (Gross Domestic Product) The ___________ of all final goods + services produced 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) Ch 13 – Economic Performance

3. 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)

4. How do we determine GDP? By determining how much each sector ______ on goods/services, we can determine the GDP. So: GDP = _______________

5. GNP (Gross National Product) The dollar amount of all final goods + services produced w/ labor + property 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

6. 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 __________.

7. 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

8. 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 $__________.

9. 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

10. 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 ____________.

11. 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

12. 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. Ch 14 – Economic Instability

13. or Recession

14. Causes of the business cycle There is no one theory, but there are several factors 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).

15. The Great Depression Farm Foreclosure Rate (1920-1930) During 1920s, US economy appeared to be 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 ________ .

16. Stock Market Crashes Crowd gathering on Wall Street after the 1929 crash. _________, 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.

17. 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.

18. 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 + ______________ 65%. 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 Collapse of World Trade Following Smoot-Hawley Tariff of 1930

19. 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: It doesn’t count those who are too _______________ to look for work. It doesn’t count those who are working _______ even if they wish to gain full-time employment.

20. 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

21. Determining inflation (From last chapter) Inflation is the in the general price level. To determine the rate of inflation, economists 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.

22. Patterns of inflation Inflation tends to faster during ___________ 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 ______________.

23. 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 __________________.

24. 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

25. 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

26. 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

27. 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 _________________ Ch 15 – The Fed and Monetary Policy

28. Structure of the Fed Ben Bernanke Chairman 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. 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…).

29. Regulatory responsibilities Regulates + monitors the $ its 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…

30. 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

31. 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.

32. 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.

33. 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).

34. 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).

35. 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

36. Impact of monetary policy Other monetary policy issues 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 $. ________ – 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

37. 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 Ch 16 – Achieving Economic Stability

38. Macroeconomic equilibrium Aggregate supply is the ________ of goods + 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

39. 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.

40. 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.

41. 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

42. 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…).

43. 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