Download Unit 3: Microeconomic Concepts

Unit 3: Macroeconomic
Concepts
The Impact of Economics on the American Economy
Micro vs. Macro

What’s the difference?

Micro – studying economic behavior and
decisions in small units  individuals,
households, etc.

Macro – studying economic behavior and
decision making in an entire economy
 ex. Nation, state, etc.
Measuring the Economy

We look at…
◦ Overall levels of income
◦ Employment
◦ Prices

These data sources can provide a picture
of the overall economy…
Why do you think this is?
What Impacts our Measurements?

Spending and production decisions made
in the Resource (Factor) and Product
Markets
◦ Driven by households, business, and
government
 Remember Circular Flow????
Gross Domestic Product (GDP)

The primary tool of measurement

GDP is the total market value of all
goods and services produced within a
country in a given time period.
◦ Includes items produce within the country
GDP Measures Economic Growth

“Real” GDP is used to measure growth from
one time period to the next

Nominal GDP uses current prices to
determine market value
Real GDP adjusts prices for inflation to
determine market value

Why is adjusting for inflation necessary for
comparison?
Calculating GDP – Using the
Expenditure Approach

Expenditure Approach – calculated by
totaling transactions in the…Product
Market
GDP = C + I + G + (X-M)
C = Consumer Spending on Goods
(durable and non-durable) & services
I = Business Investment in capital goods
G = Government Spending
(X-M) = Total Exports – Total Imports give
you net exports
Economic Growth
GDP Growth = Outward shift of
Production Possibilities Curve
Economic Growth

Occurs when there is an increase in Real
GDP compared to a previous time
period.
(𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 2 − 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 1)
𝑋 100
(𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 1)
Influences on GDP

Aggregate Supply- the total amount of
goods and services in the entire economy
available at all possible price levels…
◦ Average of all prices in the economy
Aggregate Supply Curve
AS curve illustrates relationship between prices
and output supplied (seen in GDP)
Influences on GDP (cont.)

Aggregate Demand- the amount of
goods purchased at all possible price
levels
◦ This is driven by the collective behavior of
consumers in an economy…
Aggregate Demand Curve
As Price Levels increase, demand for goods and
services decreases (change in quantity impacts GDP)
Equilibrium in the Macro
Intersection of AS & AD is an “ideal” economy…
What effect would shifting Demand or Supply have
on GDP?
Causes of Shifts in AS and AD

Business Investment
◦ Increases lead to more jobs – AD
GDP increases (economy grows)
& the
Causes of Shifts in AS and AD

Consumer Expectations
◦ Consumer confidence effects the economy
◦ When good things are expected to happen,
consumer confidence grows
spending increases, AD
(GDP) grows
& economy
Causes of Shifts

Interest Rates
(the cost of borrowing money)
◦ Low rates = business investment grows and
creates jobs & people borrow more $ to buy
and do
AD
and economy (GDP) grows
Causes of Shifts

External Shocks impact AS
◦ Negative – wars, droughts, trade disputes,
natural disasters
cause AS & economy (GDP) shrinks
◦ Positive – new discoveries of resources,
record crop production due to perfect
weather conditions
cause AS & economy (GDP) grows
Factors Impacting GDP & Economic
Growth

Inflation – Increase in average Price
Level of all goods and services
◦ AD is increasing faster than AS
◦ Effects:
 Decline in Purchasing Power of the dollar
 Real Wages Decline because they grow slower
than the Inflation Rate (IR)
 Interest Rates Increase
 Loss of $ in Savings Investments
 Increased Production Costs
Factors Impacting GDP & Economic
Growth

Types of Inflation
◦ Demand-Pull – occurs when increased AD
“pulls” prices higher
◦ Cost-Push – occurs when costs for factors
of production increase and “pushes” prices
higher
Factors Impacting GDP & Economic
Growth
https://www.youtube.com/watch?v=BHw4NS
tQsT8

Deflation – decrease in overall Price Levels

Hyperinflation – Inflation Rate (IR) is several
hundred % vs. normal rate that is (1% to 3%)

Stagflation – occurs when there is both a
RISING Price Level and a DECREASE in Real
GDP
◦ Typically comes with rising unemployment
How We Measure These

Consumer Price Index (CPI) –
measurement of inflation using price levels for a
fixed group of products called the “Market
Basket”.

The “Base Year” (comparison year) is given a
standard value or “index” of 100
◦ 1982-84 is the current Base Year time period
◦ The CPI for every year is based on this scale
CPI Calculation
Calculating the CPI
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑌𝑒𝑎𝑟 2
𝐶𝑃𝐼 =
× 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑌𝑒𝑎𝑟 1
Example:
Year 2 Basket is 229 and Year 1 is 212
CPI = (229/212)x100 = 1.08 x 100 = 108
Therefore, the CPI for Year 1 = 100 and Year 2 = 108
Means inflation from Year 1 to Year to is 8%
Calculating Inflation Rate
Inflation (IR) is calculated by comparing two
years…
( 𝑌𝑒𝑎𝑟 2 𝐶𝑃𝐼 − 𝑌𝑒𝑎𝑟 1 𝐶𝑃𝐼)
𝐼𝑅 =
𝑋 100
(𝑌𝑒𝑎𝑟 1 𝐶𝑃𝐼)
Example:
CPI for 1998 was 163 and for 2013 it was 229
IR = (229 – 163)/(163) x 100 = (66/163) x 100 = 40.5%
There was 40.5% inflation from 1998 to 2013
Factors Impacting GDP & Economic
Growth

Unemployment – refers to people who
do not currently hold a job, but are
actively seeking one.
◦ Means we are inefficient using one of our
major factors of production
◦ Point of Underutilization in Production
Possibilities
Unemployment
Unemployed are those without a job, but
actively seeking one
 Another measure of our economy


Calculated by simple division:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
(Total Labor Force)
x 100
Unemployment

Three (Four) Types
◦
◦
◦
◦
Structural
Cyclical
Frictional
(Seasonal)
See Graphic Organizer & Article
The Business Cycle
The Business Cycle

A graph that illustrates the relationship
between real GDP and time.
◦ Y-axis – Real GDP
◦ X-axis – time
Four Parts of the Cycle

Peak – the highest point of real GDP
between the end of an economic
expansion and beginning of an economic
contraction

Contraction – phase in cycle when real
GDP is declining
◦ > 6 months (two quarters) is recession
◦ If long/sustained, it is depression
Four Parts of the Cycle

Trough – the lowest point of real GDP
between the end of a contraction and
beginning of a recovery

Expansion - when real GDP becomes
positive after a period of negative real GDP
◦ Recovery lasts until real GDP reaches the
previous level at peak
◦ Called expansion/prosperity after the previous
level is achieved
Business Cycle Graph Activity

On your provided paper
1. Label Y-Axis as “Real GDP”
2. Label X-Axis as “Time”
3. Draw the Business Cycle on your graph as
big as possible, but leave room for labels
4. On the back of the paper write the
definitions for peak, trough, contraction,
expansion, and recovery
Business Cycle Graph
Answer these questions:
5.
◦
◦
Why do you think the expansion on your
chart is divided between a recovery and
prosperity? How do you find the start of
prosperity?
How long must a contraction last before it
can be considered a recession?
Business Cycle Graph
6.
Label the following economic indicators
on your graph:
CPI
CPI
Unemployment
Unemployment
Real GDP
Real GDP
Business Cycle Graph
Closing discussion questions:
7.
◦
Monetary Policy is the Federal Reserve
Bank’s power to increase or decrease the
supply of money in the economy. They can
do this by increasing or decreasing interest
rates.


If the FED is worried about inflation, what would
they want to do about the supply of money in the
economy?
Would they raise or lower interest rates to do
this?
Business Cycle Graph
◦ Fiscal Policy is the power of Congress to
increase or decrease taxes and increase or
decrease government spending.
 When the government is worried about inflation
should they increase or decrease government
spending?
 Should they increase or decrease taxation?
The Federal Reserve and Monetary
Policy

The Federal Reserve Bank
◦ Created in 1913 to instill trust in the nation’s
banks
◦ “Banker’s Bank” – the money from our banks
flow through the FED
◦ Also the government’s bank
The FED Structure
Led by the Chairman the FED –
nominated by the President and serves
for14 years
 Has 12 District Banks spread across
the country
 Federal Open Market Committee

◦ Meets to study the health of the economy
◦ Made up of district bank presidents and a
Board of Governors appointed by the
President
FED District Banks
Goals of the FED

Promote Price Stability
◦ Control inflation/deflation

Promote Full Employment
◦

No cyclical unemployment
Promote Economic Growth
◦ Increase GDP
How does the FED Meet these
Goals?

MONETARY POLICY
◦ Refers to 3 tools the FED uses to meet these
goals
Tool # 1- Open Market Operations

FED buys/sells government treasuries
(like bonds) from the “public”
◦ FED selling is essentially a loan that will be
paid back with interest – decreases the $
supply in the economy
◦ FED buying back – increases the $ supply in
the economy
Tool #2 – Change Discount Rate
Second most common
 It’s the interest rate that the FED charges
member banks to borrow from them
 Raising/lowering the rate impacts how
much $ banks can borrow
 Banks can give temporary loans from
each other

◦ FED Funds Rate is what they charge each
other
Tool #3 – Change Reserve
Requirement
Least Common Tool
 % of deposits banks must keep on hand
(in reserve) & can’t loan out
 Raising/lowering the % requirement
impacts how much a bank can lend

What if the requirement was changed to 20% - how
much of the $10,000 could the bank lend?
Summary of Monetary Policy

Contractionary (Tight Money) – uses
tools to decrease money supply
◦ How will it use each of the 3 tools to do this?

Expansionary (Loose Money) – uses tools
to increase money supply
◦ How will it use each of the 3 tools to do this?
Government and Fiscal Policy

Fiscal Policy - the power of the
government to use government spending
and taxation policies to influence
economic activity.
Fiscal Policy Goals

Price Stability

Full Employment

Economic Growth
Fiscal Policy Tools

Taxation & Government Spending
◦ Occurs at federal, state, and local levels
◦ Typically proposed by the executive branch (ex.
President) and legislature (ex. Congress) writes a
bill to address the action
◦ Bills often have many projects added on to it in
order to get it passed & become a law
◦ Many laws have clauses that allow additional
taxes/spending without adding new laws
Tool #1: Taxation

Many taxes grow with the economy
“automatic stabilizers”
◦ Income Tax is a Progressive Tax because tax
dollars paid increase as salary increases
 Tax collection increases with inflation in salaries
 Tax collection decreases with deflation in salaries
◦ Sales Tax dollars collected also increase
when prices of products increase
Use of Taxes

Tax increases = less consumer net
income & spending declines
◦ Raising taxes is a Contractionary Tool

Tax decreases = more consumer net
income & spending increases
◦ Lowering taxes is an Expansionary Tool
Tool #2: Government Spending

Governments can increase or decrease
spending to influence the economy
◦ More spending increases government investment
more workers & businesses
◦ Less spending decreases government investment
less workers & businesses
What kind of fiscal tool was the New Deal
supposed to be?
Why can’t the government keep spending more
to keep the economy growing?
Debt vs. Deficit

What is the difference between a
government budget deficit and
government debt?
Debt vs. Deficit

Deficits – occur when government
spending exceeds its revenue in their
annual budget…occurs in one year
◦ Opposite would be a Surplus
◦ Balanced budget occurs when expenses =
income

Debt – the compilation of all deficits plus
interest owed…grows over many years
Government Debt

Why doesn’t the government cut back all
its spending so we can get out of debt?
United States Debt