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SSEMA1, SSEMA2, SSEMA3-EOCT Review

SSEMA1, SSEMA2, SSEMA3-EOCT Review. SSEMA1-A.The Components of GDP. Recall: GDP is total spending. Four components: Consumption ( C ) Investment ( I ) Government Purchases ( G ) Net Exports ( NX ) These components add up to GDP (denoted Y ):. Y = C + I + G + NX.

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SSEMA1, SSEMA2, SSEMA3-EOCT Review

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  1. SSEMA1, SSEMA2, SSEMA3-EOCT Review

  2. SSEMA1-A.The Components of GDP Recall: GDP is total spending. Four components: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) These components add up to GDP (denoted Y): Y = C + I + G + NX

  3. U.S. GDP and Its Components, 2007 billions % of GDP per capita Y $13,841 100.0 $45,825 C 9,734 70.3 32,228 I 2,125 15.4 7,037 G 2,690 19.4 8,905 NX –708 –5.1 –2,344

  4. A C T I V E L E A R N I N G 1GDP and its components In each of the following cases, determine how much GDP and each of its components is affected (if at all). A.Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. B.Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. C.Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. D.General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them.

  5. A C T I V E L E A R N I N G 1Answers A.Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. Consumption and GDP rise by $200. B.Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. Investment rises by $1800, net exports fall by $1800, GDP is unchanged. 5

  6. A C T I V E L E A R N I N G 1Answers C.Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. Current GDP and investment do not change, because the computer was built last year. D.General Motors builds $500 million worth of cars, but consumers only buy $470 million of them. Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million. 6

  7. SSEMA1-B. • Gross Domestic Product (GDP) • the total value of all final goods and services produced in the US • Economic Growth • Growth allows successive generations to have more and better goods and services than their parents. An increase in standard of living • Unemployment • The percentage of the nation’s labor force that is out of work

  8. SSEMA1-B. • Consumer Price Index (CPI) • A price index determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer • Inflation • The general rise in price levels • Stagflation • A decline in real GDP combined with a rise in the price level • Aggregate Supply • The total amount of goods and services in the economy available at all possible price levels • Aggregate Demand • The total amount of goods and services in the economy that will be purchased at all price levels.

  9. SSEMA1.-C. Real GDP Per Capita • Real GDP is the value of the total production of goods and services within a country during a particular period time (usually one year). The number is adjusted for inflation so one year’s production can be compared with another’s. • Per Capita GDP is the GDP figure divided by the population of the country

  10. Real versus Nominal GDP Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not. Nominal GDPvalues output using current prices. It is not corrected for inflation. Real GDPvalues output using the prices of a base year. Real GDP is corrected for inflation.

  11. EXAMPLE: Compute nominal GDP in each year: 2005: $10 x 400 + $2 x 1000 = $6,000 2006: $11 x 500 + $2.50 x 1100 = $8,250 2007: $12 x 600 + $3 x 1200 = $10,800 37.5% 30.9% Increase:

  12. EXAMPLE: Compute real GDP in each year, using 2005 as the base year: $10 $2.00 20.0% 16.7% Increase: 2005: $10 x 400 + $2 x 1000 = $6,000 2006: $10 x 500 + $2 x 1100 = $7,200 2007: $10 x 600 + $2 x 1200 = $8,400

  13. SSEMA1-C.Inflationetc. Inflation: rise in general price level change in price level Inflation rate= beginning price level x 100 Creeping inflation: 1-3% per year Galloping inflation: intense; 100-300% per year Hyperinflation: 500% per year and above Deflation: decrease in general price level

  14. EXAMPLE: The change in nominal GDP reflects both prices and quantities. 37.5% 20.0% 30.9% 16.7% • The change in real GDP is the amount that GDP would change if prices were constant (i.e., if zero inflation). Hence, real GDP is corrected for inflation.

  15. SSEMA1-C. Who is “Unemployed?” Three criteria: • Available for work & • made specific effort to find a job in the past month • Worked for pay < 1 hour in the past week (people with part-time jobs are considered employed)

  16. SSEMA1-C. Unemployment unemployment rate calculation: Number of unemployed individuals Total # of persons in civilian labor force

  17. How the CPI Is Calculated Fix the “basket.”The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” Find the prices.The BLS collects data on the prices of all the goods in the basket. Compute the basket’s cost.Use the prices to compute the total cost of the basket. 0

  18. How the CPI Is Calculated Choose a base year and compute the index.The CPI in any year equals 100 x cost of basket in current year CPI this year – CPI last year cost of basket in base year CPI last year Inflationrate x 100% = 0 Compute the inflation rate.The percentage change in the CPI from the preceding period.

  19. EXAMPLE basket: {4 pizzas, 10 lattes} year price of pizza price of latte 2007 $10 $2.00 2008 $11 $2.50 2009 $12 $3.00 115–100 130–115 15% x100% x100% = = 100 115 13% 0 cost of basket $10 x 4 + $2 x 10 = $60 $11 x 4 + $2.5 x 10 = $69 $12 x 4 + $3 x 10 = $78 Compute CPI in each year 2007: 100 x ($60/$60) = 100 2008: 100 x ($69/$60) = 115 2009: 100 x ($78/$60) = 130 using 2007 base year: Inflation rate:

  20. 0 A C T I V E L E A R N I N G 1Calculate the CPI CPI basket: {10 lbs beef, 20 lbs chicken} The CPI basket cost $120 in 2004, the base year. A. Compute the CPI in 2005. B. What was the CPI inflation rate from 2005-2006? 20

  21. A C T I V E L E A R N I N G 2Answers CPI basket: {10# beef, 20# chicken} Household basket in 2006: {5# beef, 25# chicken} A. Compute cost of the 2006 household basket. ($9 x 5) + ($6 x 25) = $195 21

  22. A C T I V E L E A R N I N G 2Answers CPI basket: {10# beef, 20# chicken} Household basket in 2006: {5# beef, 25# chicken} B. Compute % increase in cost of household basket over 2005-6, compare to CPI inflation rate. Rate of increase: ($195 – $150)/$150 = 30% CPI inflation rate from previous problem = 40% 22

  23. SSEMA1-D.Types of unemployment • Frictional: Unemployed people don’t always take the very first job they can find. They often wait to find a job that fits their talents and preferences. While they search for a job that is a good fit, these people are frictionally unemployed. Other people sometimes purposefully decide to leave a job and look for one that better fits their interests and abilities. These job seekers are also considered frictionally unemployed. Overall, frictional unemployment is not entirely bad for an economy because it gives people time to find a job that suits their needs. • Structural: Structural unemployment occurs when you have job skills that no one wants, or when a company wants to hire somebody but can’t find anyone who has the necessary requirements. Suppose you worked at a company that made old-fashioned phones with dials. Almost no one wants these phones anymore, so once your company closes there is no place for you to use your old-fashioned-phone-making skills. At the same time, suppose that a local company needs people who can design computer networks, but no one in the community has experience in this area. This type of mismatch is a typical example of structural unemployment.

  24. Unemployment- continued • Cyclical:Most economies encounter cyclical periods of growth and recession. During boom years, unemployment drops dramatically as companies hire new workers to match the higher demand. However, boom periods often overreach, and these are followed by recessions. People who are laid off as a result of a contracting economy are cyclically unemployed. • Seasonal: due to changes in weather or change in demand for certain products

  25. You might find a question like the following on the EOCT: Peggy, a recent college graduate, decides to look for a job instead of going to graduate school. If she is unable to find a job that suits her interests right away, what type of unemployment is she MOST likely experiencing? A structural B seasonal C frictional D cyclical

  26. Answer to sample question While Peggy may be experiencing cyclical unemployment because of a downturn in the economy, the question notes that she is trying to match her skills with a job that she wants. Therefore she is experiencing frictional unemployment (choice C).

  27. SSEMA1-E.Cycle Phases Recession & Depression • Recession: real GDP decreases for 2 quarters (6 months) in a row • Depression: severe recession w/3 more elements • Very high unemployment • Acute shortages • Excess manufacturing capacity (idle or partially unused factories)

  28. SSEMA1-E.Cycle Phases • As GDP increases, there is expansion. When expansion reaches a peak, recession begins. Recession ends at the trough, and expansion (and recovery) begin at that point. The British call the peak a boom We call the line above the trend line.

  29. SSEMA1-F National Debts and Government Deficits What is the difference between national debt and government deficits? • National debt is all the money the gov’t owes to bondholders • Gov’t deficits is when the gov’t spends more than it raises in revenues

  30. Total Public Debt:

  31. SSEMA2 The student will explain the role and functions of the Federal Reserve System. • a. Describe the organization of the Federal Reserve System. • b. Define monetary policy. • c. Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth.

  32. SSEMA2-What is the Fed? • The nation’s first true central bank • Created in 1913 • National banks required to be member • State banks eligible to be a member • Privately owned Publicly operated • Federal Reserve Notes (gold standard 1913-1934)

  33. a. Describe the organization of the Federal Reserve System. The Federal Reserve System consists of: • Board of Governors(7 members), located in Washington, DC • 12 regional Fed banks, located around the U.S. • Federal Open Market Committee (FOMC), includes the Bd of Govs and presidents of some of the regional Fed banks The FOMC decides monetary policy.

  34. Structure of the Fed Board of Governors (regulatory and supervisory group) 14 year terms General policies Annual Report to Congress Monthly Public Bulletin

  35. Structure of the Fed 12 Districts, 25 Branches

  36. Structure of the Fed Federal Open Market Committee (FOMC) (the Fed’s primary monetary policy body) How does the money supply grow? Where are interest rates set? 12 voting members

  37. Responsibilities of the Fed State Member banks Monitor reserves Bank Holding Companies International Operations Foreign banks own about 20% of US banking assets Approx. 800 branches of US banks abroad Member bank mergers

  38. b. Define monetary policy. Actions by the Federal Reserve System to expand or contract the money supply in order to affect the cost and availability of goods

  39. c. Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth.

  40. The Fed’s 3 Tools of Monetary Control 1. Open-Market Operations (OMOs): the purchase and sale of U.S. government bonds by the Fed. 0 • To increase money supply, (recession) Fed buys govt bonds, paying with new dollars. …which are deposited in banks, increasing reserves …which banks use to make loans, causing the money supply to expand. • To reduce money supply, (inflationary period) Fed sells govt bonds, taking dollars out of circulation, and the process works in reverse.

  41. The Fed’s 3 Tools of Monetary Control 1. Open-Market Operations (OMOs): the purchase and sale of U.S. government bonds by the Fed. 0 • OMOs are easy to conduct, and are the Fed’s monetary policy tool of choice.

  42. The Fed’s 3 Tools of Monetary Control 2. Reserve Requirements (RR):affect how much money banks can create by making loans. 0 • To increase money supply, (recession) Fed reduces RR. Banks make more loans from each dollar of reserves, which increases money multiplier and money supply. • To reduce money supply, (inflationary period) Fed raises RR, and the process works in reverse. • Fed rarely uses reserve requirements to control money supply: Frequent changes would disrupt banking.

  43. The Fed’s 3 Tools of Monetary Control 3. The Discount Rate: the interest rate on loans the Fed makes to banks 0 • When banks are running low on reserves, they may borrow reserves from the Fed. • To increase money supply, (recession) Fed can lower discount rate, which encourages banks to borrow more reserves from Fed. • Banks can then make more loans, which increases the money supply. • To reduce money supply, (inflationary period) Fed can raise discount rate.

  44. The Fed’s 3 Tools of Monetary Control 3. The Discount Rate: the interest rate on loans the Fed makes to banks 0 • The Fed uses discount lending to provide extra liquidity when financial institutions are in trouble, e.g. after the Oct. 1987 stock market crash. • If no crisis, Fed rarely uses discount lending – Fed is a “lender of last resort.”

  45. Here is what a question for this standard might look like: The Federal Reserve wants to reduce the nation’s money supply. This could be accomplished by doing all of the following EXCEPT A decreasing the discount rate B increasing the reserve requirement C selling securities on the open market D making banks hold a reserve for all types of deposits

  46. Answer to sample question Decreasing the discount rate will encourage banks to borrow money from the Federal Reserve and make loans. This will increase the money supply, so choice A is the correct answer. All other choices reduce the nation’s money supply.

  47. SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth. • a. Define fiscal policy. • b. Explain the government’s taxing and spending decisions.

  48. a. Define fiscal policy. • The use of gov’t spending and revenue collection to influence the economy

  49. Federal Taxation Revenue Spending • Social Security • National Defense • Medicare • Debt Payments • Transportation • Agriculture • Education • Health and Human Svcs Revenue Collections • Individual Income Taxes • Social Insurance Taxes • Corporate Income Tax (revenue tax) • Excise Taxes • Estate and Gift Taxes • Customs Duties • Tariffs

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