Download Milestone Unit 3 Study Guide

eEOCT Study Guide
Adapted from GA Dept. of Education Economics EOCT Study Guide
Unit 3: Macroeconomic Concepts
Macroeconomics- the study of large-scale economics, or the national economy as a whole
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Topic 1: Key Economic Indicators (SSEMA 1)
Factors such as Gross Domestic Product, Consumer Price Index (Inflation), Aggregate Supply & Demand,
and Unemployment Rate are good indicators of the overall health of an economy.
Economic Growth is the goal for every economy and is a measure of the increase of production in an
economy, which is usually expressed by the % increase in Real GDP
GROSS DOMESTIC PRODUCT
- Gross Domestic Product (GDP)- the market value of all goods and services produced in a country in a given
amount of time (usually a year)
o GDP is most commonly calculated using the expenditures approach- which adds the money spent by
a country’s consumers, firms, and government, then factors in net exports.
 C + I + G + Xn= GDP
 C= consumer expenditures, I= business investment, G= government expenditures, Xn= net
exports (the value of exports minus the value of imports)
o Comparing GDP from year to year can indicate growth or shrinkage of the economy
o Inflation (increases in price) can distort GDP, so economists usually use Real GDP (GDP which has
accounted for inflation)
INFLATION & CPI
- Consumer Price Index (CPI)- a list of the prices of products that a typical household will purchase
o The CPI is compared from year to year to determine the rate of inflation or deflation (decrease in
price)
o Inflation Rate= (Year 1 Cost -Year 2 Cost) ÷ Year 1 Cost X 100
o Inflation rate is expressed as a %
AGGREGATE SUPPLY & DEMAND
- Aggregate Supply & Demand- total amount of all goods and services supplied & demanded in the economy
o Aggregate demand can be affected by the savings/spending rate
 Higher savings causes left shift whereas higher spending causes a right shift
o Aggregate demand can also be affected by government taxing/spending decisions
 Higher taxes causes left shift in demand, whereas lower taxes cause right shift
 Lower government spending causes left shift, whereas higher government spending causes
right shift
 Left shifts in aggregate demand signal a decrease in GDP, while right shifts signal an
increase in GDP
o Aggregate Demand shifts also cause price to change
 Right Shifts in AD cause inflation (see graph below)
 Left Shifts in AD cause deflation (see graph below)
o Aggregate supply can be affected by changes in overall costs of production
 Increases in the cost of vital resources such as oil or labor cause left shifts, whereas decreases
in the price of those resources causes right shift
 Left shifts in aggregate supply signal a decreasing GDP, while right shifts signal an increase
in GDP
 Stagflation can occur when aggregate supply decreases while price increases (Very bad!)
o Aggregate Supply shifts can also cause price to change
 Right shifts in AS cause deflation (see graph below)
 Left shifts in AS cause inflation (illustrate this scenario on the graph below)
UNEMPLOYMENT
o Unemployment Rate- the percentage of people who are able to work but cannot find a job is the
unemployment rate
o High unemployment rates indicate an unhealthy economy, while low unemployment indicates
economic growth and increasing GDP.
 Discouraged workers- people who have given up looking for a job, and underemployed- parttime employees who wish to work full time or people who are over-qualified for the job are
left out of the unemployment rate
o Types of Unemployment
 Structural- results from workers lacking of skills needed for the available jobs
 Difficult to address- requires re-training or moving
 Can be a sign of a changing economy
 Frictional- results from workers switching jobs, entering the job market for the first time, or
re-entering the job market
 Not considered harmful to the economy
 Cyclical- results from a down-turn (contraction) in the economy
 Sign that the economy is unhealthy
o Full Employment- means that there is no cyclical unemployment & indicates a healthy economy
- The Business Cycle
o Economies cycle though times of economic growth and economic decline, called the Business Cycle
 Times of growth, when GDP is increasing, are called Expansionary Periods
 Times of economic decline, when GDP is decreasing, are called Contractionary Periods
 The heights of expansion are called peaks
 The lowest points are called troughs
o Contractionary Periods that are unusually long are called Recessions and unusually long and severe
recessions are called Depressions
o The business cycle can be affected by the following things:
 External shocks such as wars, 9/11, Stock Market Crash, Natural Disasters, etc
 Business investment- when businesses increase investment it leads to expansion, when they
decrease investment it leads to contraction
 Interest rate increases cause a decrease in spending/increase in saving which leads to
contraction. Interest rate decreases cause an increase in spending/decrease in saving which
leads to expansion
Topic 2: The Role of the Federal Reserve System (SSEMA 2)
- The Federal Reserve System (aka: the Fed) is our national bank and was created by Congress in 1913
o Today the Fed consists of 12 District Banks, who oversee other member banks in their district and
print currency.
o Part of the Fed’s job is to use its monetary policy tools- its power to influence the money supply of
our nation to ensure that the economy remains stable by managing inflation and curbing recessions
o The Fed has three major monetary powers
 Open Market Operations- the Fed can buy and sell government securities on the open market
 The more securities it sells, the less money is in circulation, which helps to decrease
inflation
 The more it buys, the greater the amount of money in circulation, which helps to
boost a lagging economy
 Influencing the Discount Rate- the Fed can change the rate at which is lends money to
member banks, which affects the amount of money they can loan out to people
 The higher the interest rate, the less money banks will borrow from the Fed, and the
less money they will lend to individuals. This will decrease the monetary supply
curbing inflation
 The lower the interest rate, the more money banks will borrow and lend to their
members. This increases the monetary supply, spurring the economy.
 Changing the Reserve Requirement- the Fed can change the amount of money it requires
banks to hold in reserve which affects the monetary supply.
 Raising the reserve requirement prevents banks from making loans, which decreases
the monetary supply, curbing inflation
 Lowering the reserve requirement encourages banks to make loans, which increases
the monetary supply, causing economic growth
Topic 3: Fiscal Policy & the Federal Government
- The Federal Government can use its Fiscal Policy powers- the ability to tax, spend, and borrow money- to
affect the national economy.
- Remember that GDP is calculated based in part on the spending of individuals and businesses. The
government can influence their spending decision through taxes
o Higher taxes mean less consumer/business expenditures and a decrease in GDP
o Lower taxes mean more consumer/business expenditures and an increase in GDP
- The government can also increase or decrease its own spending when it creates the annual budget
o Increased spending leads to growth, while decreased spending leads to decrease in GDP
- When the economy is in a Contractionary Phase, the government should lower taxes or increase
expenditures. It can also carry out a combination of these two options.
o This means that the government will be operating at a deficit- spending more than it takes in.
o Government deficits add to the national debt- the total amount that the government has borrowed to
cover deficits.
- When the economy is experiencing inflation, it can increase taxes or cut government spending, which will
result in a left shift in aggregate demand and an overall decrease in prices. It can also carry out a
combination of these two options.
o This means that the government may have a surplus- spend less than it takes in.
o Government surpluses may be applied to paying off the national debt.