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Unit 4. Macroeconomics: Policies Ch 13 – Economic Performance Ch 14 – Economic Instability Ch 15 – The Fed and Monetary Policy Ch 16 – Achieving Economic Stability. GDP ( Gross Domestic Product ).
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Unit 4 Macroeconomics: Policies Ch 13 – Economic Performance Ch 14 – Economic Instability Ch 15 – The Fed and Monetary Policy Ch 16 – Achieving Economic Stability
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
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)
How do we determine GDP? By determining how much each sector ______ on goods/services, we can determine the GDP. So: GDP = _______________
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
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 __________.
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
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 $__________.
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
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 ____________.
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
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
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).
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 ________ .
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.
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.
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
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.
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
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.
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 ______________.
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 __________________.
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
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
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
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
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…).
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…
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
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.
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.
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).
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).
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
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
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
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
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.
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.
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
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…).
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