Macro Issues for the GHSGT

1. Macro Issues for the GHSGT • Gross Domestic Product • Nominal v. Real • Consumer Price Index • Unemployment • Inflation • Fiscal Policy Tools • Monetary Policy Tools

2. Gross Domestic Product • 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 • The spending by consumers on final goods and services • Investment • The spending by business on machinery and changes in inventory • Government Purchases • All purchases made by government, excluding transfer payments • Net Exports • The difference between imports and exports

3. Nominal vs. Real Numbers • 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

4. Consumer Price Index • 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

5. Business Cycle • Expansion • Positive and expanding GDP • Peak • The highest growth of GDP in a cycle • Contraction • Positive but declining GDP • Recession • Negative and shrinking GDP • Trough • The bottom of a GDP cycle • Recovery • Negative but increasing GDP

6. Frictional The natural unemployment that comes from individuals between jobs Programmer Cyclical The type of unemployment that stems from the changes in the business cycle Six Flags Park Types of Unemployment • Structural • The type of unemployment that stems from changes in the structure of industry • Film Cameras

7. Inflation A general rise in the level of prices • Demand-Pull • Cost-Push • Wage-Push • Supply Shock

8. Inflation Hurts: Savers Those on fixed incomes Inflation Helps: Debtors Does inflation hurt everyone?

9. Fiscal Policy Control of the money supply through government policies • Contractionary Fiscal Policy • Increase Taxes • Decrease Spending • Expansion of Fiscal Policy • Decrease Taxes • Increases Spending

10. Monetary Policy Control of the money supply through the Federal Reserve Bank • 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 rate at which the Fed loans money to member banks

11. Banks and Creation of Money There are three types of money identified by the Federal Reserve: • M1 • Most liquid • Currency and checkable deposits • M2 • M1 + Near-money savings, small time deposits, MMMF • M3 • M2 + Large time deposits

12. Banks create money through loans • 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

13. Types of Taxes • Progressive Tax: Higher % rate of tax on persons with higher incomes-Federal income tax • Regressive Tax: Higher % rate of tax on people with lower incomes-Examaple: sales tax • Proportional Tax:Same % rate of tax on everyone, regardless of income; aka flat tax