Download Macroeconomics - Bibb County Schools

Macroeconomics
Chapters 12- 16
Domain Focus
SSEMA1
The student will illustrate the means by
which economic activity is measured.
Domain Focus
SSEMA2
The student will explain the role and
functions of the Federal Reserve
System.
Domain Focus
SSEMA2
The student will explain the role and
functions of the Federal Reserve
System.
SSEMA1 The student will illustrate the means by which
economic activity is measured.
a. Explain that overall levels of income, employment, and prices are
determined by the spending and production decisions of
households, businesses, government, and net exports.
b. Define Gross Domestic Product (GDP), economic growth,
unemployment, Consumer Price Index (CPI), inflation, stagflation,
and aggregate supply and aggregate demand.
c. Explain how economic growth, inflation, and unemployment are
calculated.
d. Identify structural, cyclical, and frictional unemployment.
e. Define the stages of the business cycle, as well as recession and
depression.
f. Describe the difference between the national debt and
government deficits.
Macroeconomics
• Reminder- Macroeconomics= the study of the
behavior and the decision making of entire
economies
Circular Flow Model
Gross Domestic Product
• Gross= total
• Domestic= produced anywhere in the 50
states, by anyone
• Product= final goods and services
What does GDP measure?
Total amount of final goods and
services produced in a country
in one year.
(Measure of Output)
Gross Domestic Product
• Gross Domestic Product (GDP)- the dollar value
of all final goods and services produced within a
country’s borders in a given year
– Dollar Value- the total of the selling prices of all goods
and services produced in a country in one calendar
year
– Final Goods and Services- products in the form sold to
consumers
• Intermediate goods- used in the production of final goods
– Produced within a country’s borders- includes cars
produced in the U.S. by a Japanese automaker
Are there any cool formulas you
can give us relating to this
interesting concept?
GDP=C+I+G+(X-M)
Expenditure Approach
• C= consumption spending
(think consumers)
72%
• I= investment spending
(think businesses investing in themselves)
15%
• G= government spending
17%
• (X-M)= difference between exports and imports
-4%
Expenditure Approach
• Expenditure Approach (output-expenditure
approach)
– Estimate the annual expenditures or amounts spent on
four categories of final goods and services
• Consumer goods and services
– Durable goods- goods that last for a relatively long time
(refrigerators, cars, etc.)
– Nondurable goods- goods that last a short period of time (food, light
bulbs, etc.)
• Business Goods and services
• Gov’t goods and services
• Net exports or imports of goods and services
– Add together the amounts spent on all four categories
to arrive at the total expenditures on goods and services
produced during the year
Expenditure Approach
GDP=C+I+G+(X-M)
Income Approach
• Income Approach
– Calculates GDP by adding up all the incomes in the
economy
• Results from the two approaches are
compared to judge accuracy
What is counted in GDP?
• FINAL goods
and services
• Goods/Services produced
here, even if by a foreign co.
What is NOT counted?
• Things produced outside the
country.
• Illegal stuff
• Purely financial transactions
…and INTERMEDIATE GOODS
Limitations of GDP
• GDP does not take into account certain
economic activities
– NonMarket Activities- goods and services that
people make or do themselves
– The underground economy- black market and
illegal goods, legal informal transactions
– Negative Externalities- unintended economic side
effects
– Quality of life
Problems associated with GDP
• Slow to calculate
• Does not count everything
(it’s an estimate)
• Inflation can distort the figure
Real vs. Nominal
Nominal Versus Real GDP
• Nominal GDP- GDP measured in current
prices
• Real GDP- GDP expressed in constant, or
unchanging prices
Real and Nominal GDP
Nominal and Real GDP
Year 1
Nominal GDP
Suppose an economy‘s entire
output is cars and trucks.
Year 2
Nominal GDP
In the second year, the economy’s
output does not increase, but the
prices of the cars and trucks do:
This year the economy produces:
10 cars at $16,000 each = $160,000
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
+ 10 trucks at $21,000 each = $210,000
Total = $370,000
Total = $350,000
Since we have used the current
year’s prices to express the
current year’s output, the result
is a nominal GDP of $350,000.
This new GDP figure of $370,000
is misleading. GDP rises because
of an increase in prices.
Economists prefer to have a
measure of GDP that is not
affected by changes in prices. So
they calculate real GDP.
Year 3
Real GDP
To correct for an increase in
prices, economists establish a set
of constant prices by choosing
one year as a base year. When
they calculate real GDP for other
years, they use the prices
from the base year. So we
calculate the real GDP for Year 2
using the prices from Year 1:
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
Real GDP for Year 2, therefore,
is $350,000
Economic Growth
• Economic growth is measured by finding real
GDP per capita (real GDP divided by the total
population)
• Real GDP per capita is considered the best
measure of a nation’s standard of living.
• The basic measure of a nation’s economic
growth rate is the percentage change of real
GDP over a given period of time
Per Capita GDP
GDP divided by a country’s population
Other Income and Output Measures
• GDP is the primary measure of output
• Gross National Product (GNP)- the annual
income earned by U.S. owned firms and U.S.
citizens
– Depreciation (the loss of the value of capital
equipment that results from normal wear and
tear) is not taken into account
Aggregate Supply
 Aggregate Supply- the total amount of goods and
services in the economy available at all possible price
levels
 Economists add up the total supply of goods and services
produced for sale in the economy (GDP)
 Calculate the price level (the average of all prices in the
economy)
 As the prices of most goods and services change, the
price level changes.
 Firms respond by changing their output (real GDP)
 Prices rise- production increases
 Prices fall- production decreases
Aggregate Supply
Aggregate Demand
• Aggregate Demand- the amount of goods and
services in the economy that will be
purchased at all possible price levels
– Lower price levels means greater purchasing
power for households; falling prices increase
wealth and demand
– Higher price levels causes purchasing power to
decline; reduction in the quantity of goods and
services demanded
Aggregate Demand
AS/AD Equilibrium
• Aggregate Supply/Aggregate Demand
Equilibrium= AS/AD Equilibrium
• Any shift in aggregate supply or aggregate
demand will have an impact on real GDP and
on the price level
Aggregate Demand and Aggregate Supply Lesson
Factors that shift an AD Curve
• Changes in
–
–
–
–
Consumer Spending
Investment Spending
Government Spending
Net Export Spending
• Increases in Aggregate
Demand increase real GDP
and the price level
• Decreases in Aggregate
Demand decrease real GDP
and price level
Aggregate Demand and Aggregate Supply Lesson
Factors that shift an AS Curve
• Changes in
– The prices of inputs (land,
labor, capital, and
entrepreneurship)
– Productivity
– Technology
– Government Regulations
• Increases in Aggregate Supply
increase real GDP and lower
the price level
• Decreases in Aggregate Supply
decrease real GDP and raise
the price level
AD/AS
Business Cycles
• Business Cycles- a period of macroeconomic
expansion followed by a period of contraction
• Business cycles are not minor ups and downsthey are major changes in real GDP above or
below normal levels
Business Cycle
GDP
Phases of a Business Cycle
1. Expansion- a period of economic growth as
measured by a rise in real GDP
– Economic Growth- a steady, long-term increase in
real GDP
– Plentiful jobs, a falling unemployment rate, and
business prosperity
2. Peak- the height of an economic expansion,
when real GDP stops rising
Phases of a Business Cycle
3. Contraction- a period of economic decline
marked by falling real GDP
 Unemployment rate rises
 Recession- a prolonged economic contractiongenerally lasts from 6 to 18 months
 Depression- a recession that is especially long and
severe; high unemployment and low factory output
 Stagflation- a decline in real GDP combined with a rise
in the price level
4. Trough- the lowest point in an economic
contraction, when real GDP stops falling
What affects Business Cycles?
• Business cycles are affected by 4 main variables
1. Business Investment
•
•
When the economy is expanding businesses invest heavily in
new plants and equipment
When firms decide they have expanded enough or demand
falls they cut back on investment spending
2. Interest Rates and Credit
•
•
When interest rates are low households and firms borrow
more money
When interest rates climb, investments and job growth dries
up
What affects Business Cycles?
3. Consumer Expectations
– Fears of a weakening economy can cause
consumer confidence to fall- people begin saving
their money; the opposite is also true
4. External Shocks
• Negative External Shocks- Disruptions in the oil supply,
wars that interrupt normal trade relations, droughts
that severely reduce crop harvests
• Positive External Shocks- discovery of a large deposit of
oil or minerals, a perfect growing season
Business Cycle Forecasting
• Leading Indicators- key economic variables
that economists use to predict a new phase of
a business cycle
– Stock Market
– Interest Rates
– Manufacturers new orders of capital goods
Business Cycles in American History
• The Great Depression- the most severe
economic downturn in the history of industrial
capitalism
• John Maynard Keynes- The General Theory of
Employment, Interest, and Money
– Economies could fall into long-lasting contractions
– Government intervention might be needed to pull
an economy out of a depression
Am I Unemployed?
Unemployment
1. Structural
2. Cyclical
3. Frictional
Types of Unemployment
Frictional Unemployment
• Occurs when people change jobs, get laid off from their current jobs, take
some time to find the right job after they finish their schooling, or take
time off from working for a variety of other reasons
Structural Unemployment
• Occurs when workers' skills do not match the jobs that are available.
Technological advances are one cause of structural unemployment
Seasonal Unemployment (DO NOT NEED TO KNOW for EOCT)
• Occurs when industries slow or shut down for a season or make seasonal
shifts in their production schedules
Cyclical Unemployment
• Unemployment that rises during economic downturns and falls when the
economy improves
Structural Unemployment
Cyclical Unemployment
Frictional Unemployment
What is “unemployed”?
• People available for work who made a specific
effort to find work in the past month and who
during the most recent survey week, worked
less than one hour for pay or profit.
• Also people who worked in a family business
without pay for less than 15 hours a week.
How is unemployment measured?
• It’s an important indicator of the health of the
economy.
• Bureau of Labor statistics polls sample of population
to determine how many are employed and
unemployed.
• Unemployment rate is the percentage of nation’s
labor force that is unemployed.
• It is only a national average – it’s doesn’t reflect
regional trends.
Full Employment
• The level of employment reached when there
is no cyclical unemployment (no one out of
work because of downturn in the economy –
everyone who wants a job has one)
• 4-6% unemployment is “normal”.
Limitations
• Figures don’t count those who have become
frustrated and stopped looking for work (have
to have looked for work in the past 4 weeks)
• If you have a part time job you are considered
employed even if you would rather have a full
time job – took this one because it’s all you
could find.
The Effects of Rising Prices
• Inflation- a general increase in prices
• Purchasing power- the ability to purchase
goods and services, is decreased by rising
prices
• Price level - the relative cost of goods and
services in the entire economy at a given point
in time
Degrees of Inflation
• Creeping inflation
– Range of 1-3%
• Galloping inflation
– Can go as high as 100-300%
• Hyperinflation
– Out of control
– In range of 500%
– Doesn’t happen often – last stage before monetary
collapse. (WW II – Hungary and Germany)
Causes of Inflation
• The Quantity Theory- too much money in the
economy leads to inflation; inflation can be tamed by
increasing the money supply at the same rate that
the economy is growing.
• The Cost-Push Theory- inflation occurs when
producers raise prices in order to meet increased
costs
– Leads to wage-price spiral- the process by which
rising wages cause higher prices and higher prices
cause higher wages
Causes of Inflation
• The Demand-Pull Theory- inflation occurs when
demand for goods and services exceeds
existing supplies
• Wage-price spiral – self-perpetuating spiral –
higher prices force workers to ask for higher
wages. Producers try to recover this by raising
prices, which forces workers to ask for higher
wages….
Effects of Inflation
• Purchasing Power
– The dollar will not buy the same amount of goods that
it did in years past.
• Interest Rates
– When a bank's interest rate matches the inflation rate,
savers break even. When a bank's interest rate is
lower than the inflation rate, savers lose money.
• Income
– If wage increases match the inflation rate, a worker's
real income stays the same. If income is fixed income,
or income that does not increase even when prices go
up, the economic effects of inflation can be harmful.
Price Indexes
• Price Index- a measurement that shows how the
average price of a standard group of goods
change over time
• Consumer Price Index (CPI)- a price index
determined by measuring the price of a standard
group of goods meant to represent the “market
basket” of a typical urban consumer
– Market Basket- a representative collection of goods
and services
– Inflation Rate- the percentage of change in price level
over time
Calculating the CPI
• Price index = cost today
cost in base year
X 100
Price index is current value of a “basket” of goods and service divided
by cost of same basket in base year and then multiplied by 100.
- Mixed basket of goods used because prices can go up or down for
reasons that have nothing to do with inflation.
- Having a large group of representative items helps eliminate the
effect of some product’s price dropping while others tend to be on
the rise.
- Base year can be any year.
- Price index for the base year will always be 100.
- Index values over 100 indicate inflation.
- Index values under 100 indicate deflation.
Calculating Inflation
• To determine the inflation rate
from one year to the next:
– Take the CPI for year A and
subtract the CPI for year B
– Multiply by 100
Inflation
Calculator
www.bls.gov
Debt v. Deficit
Questions for You
• What is the national debt?
• What caused the national debt?
• Where does the government get the
money when it wants to spend more
than it takes in?
• What is a budget deficit?
• What is a budget surplus?
Budget Deficits and the National
Debt
Balanced Budget- a budget in which revenues
are equal to spending
The federal budget is almost never balanced
Budget Surplus- a situation in which the
government takes in more than it spends
Budget Deficit- a situation in which the
government spends more than it takes in
The National Debt
• National Debt- the total amount of
money the federal government owes to
bondholders
–The U.S. government is viewed as
stable and trustworthy and can borrow
money at a low interest rate
The difference between DEFICITS
and DEBT
• Deficit- the amount of money the
government borrows for one budget
year
• Debt- the sum of all government borrow
up to that time that has not been repaid
www.usdebtclock.org
SSEMA3 The student will explain how the government uses
fiscal policy to promote price stability, full employment, and
economic growth.
a. Define fiscal policy.
b. Explain the government’s taxing and
spending decisions.
Fiscal Policy
Fiscal Policy
Actions taken by the Federal
Government to influence the
economy (business cycles).
How do they do it?
Taxation (revenue)
Spending (expenditures)
-transfer payments-
How/When/Why
If the economy needs a “boost” the Federal
Government might:
_______________ taxes.
_______________ spending.
How/When/Why
If the economy needs to be “cooled off” the
Federal Government might:
_______________ taxes.
_______________ spending.
Understanding Fiscal Policy
Fiscal policies are used to achieve economic
growth, full employment, and price stability.
Federal Budget- a plan for the federal
government’s revenues and spending for the
coming year
› Lists expected income
› Shows how much money will be spent
Understanding Fiscal Policy
• Fiscal Year- a twelve-month period that can
begin on any date (October 1-September 30
for the Federal Government)
Fiscal Policy and the Economy
• Expansionary Policies- fiscal policies, like
higher spending and tax cuts, that encourage
economic growth
– Used to raise the level of output in the economy
– Encourage growth
– Government spending increases aggregate
demand
Fiscal Policy and the Economy
• Contractionary Policies- fiscal policies, like
lower spending and higher taxes, that reduce
economic growth
– Used when demand exceeds supply to slow the
growth of the economy (GDP)
– Used to slow or prevent inflation
– Leads to a decrease in aggregate demand which
leads to lower prices
Limits of Fiscal Policy
• The government cannot change spending for
entitlements
• Difficult to know the current state of the
economy (GDP)
• Even more difficult to predict future economic
performance
Keynesian Economics
 John Maynard Keynes- The General Theory of
Employment, Interest, and Money
› Comprehensive explanation of economic forces
› Told economists and politicians how to get out of
economic crises and how to avoid them
› Focused on the economy as a whole
› Productive Capacity- the maximum output that an
economy can produce without big increases in
inflation
› Demand-Side Economics- the idea that government
spending and tax cuts help an economy by raising
demand
Keynesian Economics
› Keynesian Economics- a form of demand-side
economics that encourages government action to
increase or decrease demand and output
› Fiscal policy should be used to fight periods of
recession/depression and periods of inflation
› Advocated the use of expansionary and
contractionary fiscal policies
› Multiplier Effect- the idea that every one dollar
of government spending creates more than one
dollar in economic activity
SSEMA2 The student will explain the role and
functions of the Federal Reserve System.
a. Describe the organization of the Federal
Reserve System.
b. Define monetary policy.
c. Describe how the Federal Reserve uses the
tools of monetary policy to promote price
stability, full employment, and economic
growth.
Federal Reserve Act of 1913
• Created the Federal Reserve System
• Composed of 12 independent regional banks
• Could lend money to other banks in times of
need
Structure of Federal Reserve System
• Board of Governors- the seven-member
board that oversees the Federal Reserve
System
– Appointed for staggered 14 year terms (keeps
members from being pressured politically)
– President picks a chair for a 4 year term from the
board of governors
Structure of the Federal Reserve
System
• Federal Reserve Districts- the twelve banking
districts created by the Federal Reserve Act (one
Federal Reserve Bank is located in each district)
• All nationally charted banks are required to join the
Fed
• Member banks own shares in the Fed and therefore
gives the system of high degree of political
independence
Monetary Policy
Monetary Policy DVD
Monetary Policy
The actions the Federal Reserve
(Central Bank) takes to influence the
level of GDP and the rate of inflation
in the economy.
How Do They Do It?
• Tools of the FED
1. Open Market Operations
2. Discount Rate (Fed to Banks)
3. Federal Funds Rate (bank to bank
4. Reserve Requirements
Tools of the Federal Reserve
• Open Market Operations- the buying and selling
of government securities to alter the money supply
– Bond Purchases - In order to increase the money
supply, the Federal Reserve Bank of New York buys
government securities on the open market.
– Bond Sales- When the Fed sells bonds, it takes
money out of the money supply.
• Discount Rate (Federal Reserve to Bank)- the
interest rate that banks pay to borrow money
from the Federal Reserve
Tools of the Federal Reserve
• Federal Funds Rate (bank to bank)- the
interest rate that banks pay to borrow money
from each other
• Reserve Requirement- the amount of money
that a bank must keep on hand; set by the
Federal Reserve
Fiscal and Monetary Policy Tools
Fiscal and Monetary Policy Tools
Fiscal policy tools
Expansionary
tools
Contractionary
tools
1. increasing government
spending
2. cutting taxes
1. decreasing government
spending
2. raising taxes
Monetary policy tools
1. open market operations:
bond purchases
2. decreasing the discount
rate
3. decreasing reserve
requirements
1. open market operations:
bond sales
2. increasing the discount
rate
3. increasing reserve
requirements
How/When/Why
If the economy needs a “boost” the Federal
Reserve might:
_______________ bonds.
_______________ interest rates.
_______________ reserve requirements.
How/When/Why
If the economy needs to be “cooled off” the
Federal Reserve might:
_______________ bonds.
_______________ interest rates.
_______________ reserve requirements.