Download Macroeconomics

Macroeconomics
What you need to know
SSEMA1: How is economic activity measured?
• Income, employment & prices are determined
by the decisions of households, businesses,
the government & net exports
• Gross Domestic Product: final $ value of all
products, goods, services & structures
produced inside a country in one year
• Economic growth: An increase in the capacity
of an economy to produce goods and services,
compared from one period of time to another.
• Consumer Price index (CPI): measures price
changes for a “basket” of frequently used
consumer items
• Inflation: general rise in prices
• Stagflation: stagnant growth + inflation
• Aggregate supply: total value of all goods &
services that would be produced by all firms at
all prices
• Aggregate demand: total quantity of goods &
services demanded at different price levels
Calculations
• Growth: usually measured by GDP =
Consumer Spending + Investment Spending +
Government Spending + (Exports – Imports)
• Unemployment: % (number of unemployed
people divided by # of people), based on
people who work less than 1 hour/week in a
for-profit business & who want to work
• Inflation: compares prices year by year
Types of unemployment
• Structural: caused by fundamental change in
the economy that reduces demand for
workers (like mechanization of car plants)
• Cyclical: related to swings in the business
cycle (when people save instead of spending,
some industries lay people off)
• Frictional: when workers change jobs or want
new jobs (like when teens switch jobs)
What is a Depression?
• Depression: severe economic downturn lasting several
years—last one was the Great Depression
• Many experts say that the Great Depression was
aggravated by contractionary monetary policy. The Federal
Reserve rightly sought to slow down the stock market
bubble in the late 1920s. However, once the stock market
crashed, the Fed kept raising interest rates to defend the
gold standard. Instead of pumping money into the
economy, and increasing the money supply, the Fed
allowed the money supply to fall 30%. This created massive
deflation, where prices dropped 10% each year. As people
expected lower prices, they delayed purchases. Real estate
prices plummeted 25%, and people lost their homes.
Debt vs. Deficit
• The deficit is the difference between how much the federal
government spends and how much it collects in one year. If the
government “earns” $2 trillion in taxes in one year, but spends $3
trillion, that’s a deficit of $1 trillion. In order to pay for the
difference, the government has to borrow money from itself,
American citizens, foreign countries, and other sources.
• The federal budget deficit for 2009 was a record-breaking $1.4
trillion and $1.3 trillion in 2010.
• The national debt is the total amount we owe. Every year that we
borrow more money, the debt grows larger.
• The difference between the deficit and the debt is especially
important because when politicians talk about reducing the deficit,
all that really means is that our debt isn’t growing as fast. It does
not mean we’re getting out of debt.
• CURRENT DEBT: $16 trillion and growing
(http://www.usdebtclock.org/)
What does that mean??
In more personal terms: If you have an income of
$50,000 per year, and you spend $60,000, that’s a
deficit of $10,000. You would need to borrow
that $10,000 from someone, maybe with a credit
card or a home equity loan. If you reduce your
spending the following year, to $55,000, you have
“halved the deficit”, but you’re still spending
$5,000 more than you’re earning, and going
further and further into debt. After two years,
despite halving your “deficit spending,” you’re
$15,000 in debt .
The “Fed” (Federal Reserve System)
SSEMA2
• US Central Bank
• Led by Chairman & Board of Governors: set
monetary policy
• Chairman appointed by the President: current
chairman is Ben Bernanke
• Open Market Committee: guides interest
rates
• 12 regional banks
The Fed & Monetary policy
• Primary purpose: to control inflation without
triggering a recession (monetary policy:
expanding & contracting the money supply thru
interest rates & reserve requirements)
• Also supervises the banking system,
• Works to keep markets stable…
• Is the central bank for other banks, the
government, & foreign banks.
• By restricting credit, can reduce the money
supply (higher interest rates): “contractionary”
• Lower interest rates: more credit, more jobs,
expands money supply (“expansionary”)
• Reserve requirement: 10% banks must keep
on hand. Fed loans them $ if they need it—at
discount rate through the discount window.
• (Banks would rather buy from other banks,
tho—Fed is bank of last resort)
• NOT run by government!
• Can take over banks that are “too big to fail”
to make sure they are safe for consumers
Fed functions
• Price stability: high inflation curbs growth &
costs jobs, money, etc. Fed manipulates
interest rates to keep prices as stable as
possible.
• Full employment: difficult to measure &
control; “maximum” is the goal
• Economic growth: can’t really do this without
letting inflation rise—added by Congress
Fiscal Policy [SSEMA3]
• Defined: use of government spending and
revenue collection measures to influence the
economy
• Price stability: trying to shift the curve to the
right demand-side economics (tax & spend)
[Keynesian model]
• Investing affects business: less jobs, less
spending, businesses go under, less taxes paid:
downward spiral
• Government can spend or lower taxes to
stimulate spending—deficit spending!
Supply-side economics
• Designed to stimulate production instead of
demand (Reagan)
• Reduce government role in economy
• Deregulation a major goal
• Lowering taxes
• Less taxes collected less revenue
• Some instability
Fiscal vs. Monetary policy
• Monetary policy goal: monetary growth at
low inflation rates. Lower interest rates, lower
inflation, slow growth in money supply (linked
to GDP). Not a cure for unemployment. FED!
• Fiscal policy: attempt by the government to
stabilize the economy by taxing & spending.
Plan a budget using surpluses or deficit s to
maintain steady level of spending. Examples:
unemployment, Social Security, tax cuts.
Moving away from this to monetary policy.