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Economics

Economics. Goal 3 . 3.1. Spending and production decisions influence income, employment, and prices Leading indicators help investors predict and react to the direction the market is headed.

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Economics

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  1. Economics Goal 3

  2. 3.1 • Spending and production decisionsinfluence income, employment, and prices • Leading indicators help investors predict and react to the direction the market is headed. • Inflation redistributes purchasing power and as a result imposes undesirable costs on some people while benefiting others.

  3. Macroeconomics vs. Microeconomics Macroeconomics Microeconomics • Takes a look at the big picture of the economy (long-term) • Examples • Inflation • Interest rates • Influences on employment and unemployment • Takes a look at the small picture of the economy (short-term) • Examples • Rise and fall of prices • Decisions that affect supply and demand

  4. Business Cycle

  5. The Business Cycle • Parts of a Business Cycle: • Prosperity- state of flourishing or thriving • Peak- the highest point of prosperity • Recession- slowdown in the economy • Depression- long-term economic downturn • Recovery- pick-up in economic activity

  6. Gross Domestic Product (GDP): Indicator GDP is the total value of all final goods and services produces within a country in a given period (July 1 – June 30) • GDP does measure: • Final goods and services • Production • Nations economic growth • GDP does not measure: • Underground activity • Wealth • Foreign-made goods and services

  7. National Debt: Indicator • The amount of money owed by the federal government

  8. Unemployment: Indicator • Causes • Unemployment insurance • Skills mismatch • Waiting periods • Moving, changing jobs, or graduation • Economic conditions • Less labor demands • How to calculate UNEMPLOYEMENT RATE= UNEMPLOYED/LABOR FORCE X 100

  9. Consumer Price Index: Indicator • Measures the monthly changes in costs of goods and services by monitoring the prices of goods/services that are typically purchased by consumers • Measures inflation rate • Examples: • Breakfast cereal • Milk • Housing (own or rent) • Apparel • Transportation (# of cars sold) • Recreation purchases

  10. Standard of Living: Indicator • The level of economic prosperity at which a person lives

  11. 3.2 • Fiscal Policy • Use of revenue (primarily taxes) and spending to affect the economy • Can provide stimulus during economic recession. • Monetary policy • Monetary policy is used by the national government (The Federal Reserve) to manipulate the money supply • Can prevent inflation.

  12. Money Supply • Changes in the money supply can lead to changes in interest rates which, in turn, affect the availability of credit, the average level of prices and national levels of spending and output.

  13. Fiscal Policy • To stimulate economic growth: (get us out of recession) • Cut taxes • increase government spending

  14. Fiscal Policy • To prevent inflation: (slow down a peak period) • Raise taxes • Spend less money/ cut spending

  15. Monetary Policy: eases us out of recession by stimulating growth • Lowering the reserve requirement (easy money policy) • Lowering the discount rate (interest rate) • Buying securities (bonds) …uses open market operation • Allows banks to have more money on hand to loan (more money in circulation) • Lowers the interest rate which makes it more desirable to borrow money (more money in circulation) • Pays money to investor ( more money in circulation)

  16. Monetary Policy: controls inflation and slows down a peak • Raising the reserve requirement (Tight money policy) • Raising the discount rate (interest rate) • Selling securities in open market operations • Takes money out of the hands of banks....banks do not have the money to loan (reduces the money supply • Makes getting a loan undesirable (reduces the money supply) • When investors buy bonds (securities) the money goes into the hands of “The Fed” (reduces money supply)

  17. Who uses Fiscal and Monetary policy? Fiscal Policy Monetary Policy • Fiscal Policy • Used by all levels of government • National • State • Local • Used by the National government only • The Federal Reserve

  18. STOP AND THINK • HOW IS FISCAL AND MONETARY POLICY HELPFUL TO THE ECONOMY? • WHY WOULD THIS BE CONTROVERSIAL?

  19. 3.3: Federal Reserve system: The FED • Central banking system of the United States • Job/Function: • Affects the amount of money banks can lend • Influence interest rates • Create money when they make loans

  20. “Fiat” Money • Paper money is no longer “backed” by gold. Value is dependent on the amount of money that the Federal Reserve allows banks to create. • The term “fiat” money- is money that has value only because of government regulation or law

  21. Job of Central Banking • A central bank has a monopoly on creating the currency of a nation and functions to provide a nation’s money supply. • National governments can control the supply of money • Connects borrowers to savers • Entrepreneurs get money for new businesses by borrowing money through banks.

  22. The economy is cyclical- meaning it will eventually even itself out • Problems arise though when: • When people become afraid that too many loans will not be repaid • a financial panic or a “run” on the banks may occur.

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