Download Macroeconomics

Macro Issues
 Gross Domestic Product
 Nominal v. Real
 Consumer Price Index
 Unemployment
 Inflation
 Fiscal Policy Tools
 Monetary Policy Tools
Gross Domestic Product

 Gross Domestic Product is the measure of the final goods and services that
are bought and sold in an economy in a given period
 It is measured through adding together consumption, investment, government
purchases, and net exports
 C+I+G+X is the formula
 Consumption
 The spending by consumers on final goods and services
 Investment
 The spending by business on machinery and changes in inventory
 Government Purchases
 All purchases made by government, excluding transfer payments
 Net Exports
 The difference between imports and exports
Review Questions

"The market value of all final
goods and services
produced within a nation
in a given year." This best
describes:
A)Net domestic product
B)Gross domestic product
C)National income
D)Personal income
GDP:
A)includes the value of both market
and non-market transactions
B)corrects for improved product
quality over time
C)corrects for improved
productivity that results in
increased leisure time
D)does not include transactions
conducted "off-the-books"
Review Questions

The "G" term in C + Ig + G + Xn
includes all of the following
except:
A)state government purchases of
new computers
B)Social Security checks received by
retirees
C)salaries received by members of
the military
D)local government expenditures
for new school construction
In calculating GDP:
A)both exports and imports
are added
B)neither exports nor imports
are added
C)exports are added and
imports are subtracted
D)imports are added and
exports are subtracted
Consumer Price Index
 The Consumer Price Index is what
we use to measure the cost of
living in the United States
 It is a measure of 300 goods and
services that is referred to as a
“market basket”
 This is how we measure the
difference between nominal and
real costs
 This is also how we measure
inflation
 Cost of living allowances are tied
to CPI
Nominal vs. Real
Numbers
 Nominal are the actual dollar
values computed during the
given time period
 Real numbers are computed
based on a “base year’s” dollars
 The reason we do this is to get a
better indication of the costs of
products and services and the
cost of living
Review Questions

Real GDP is found by:
A)adding depreciation to nominal GDP
B)adjusting nominal GDP by the CPI
C)adding up the dollar value of all transactions in the
economy in a given year
D)excluding exports and imports from nominal GDP
Business Cycle
 Expansion
 Positive and expanding GDP
 Peak
 The highest growth of GDP in a
cycle
 Contraction
 Positive but declining GDP
 Recession
 Negative and shrinking GDP
 Trough
 The bottom of a GDP cycle
 Recovery
 Negative but increasing GDP
Types of Unemployment

Frictional
The natural
unemployment that comes
from individuals between
jobs
Structural
The type of
unemployment that stems
from changes in the structure
of industry
Cyclical
The unemployment that
stems from the changes in
the business cycle
Seasonal
The type of
unemployment that comes
from changes in the season
Inflation
A general rise in the level of
prices
 Demand-Pull
 Consumer demand for a
product “pulls” up the price
 Cost-Push
 Wage-Push
 Supply Shock
 Stagflation
 Unemployment and
Inflation together
 How do we combat this?
Review Questions

Inflation:
A)reduces both the purchasing
power of the dollar and one's
real income
B)reduces the purchasing power of
the dollar and increases one's
real income
C)reduces the purchasing power of
the dollar but may have no
impact on one's real income
D)increases the purchasing power
of the dollar and reduces one's
real income
The war in Iraq sent oil prices
spiraling upwards, resulting
in an increase in the overall
price level. This is an
example of which type of
inflation?
A)Cost-pull
B)Cost-push
C)Demand-pull
D)Demand-push
Does inflation hurt everyone?

Inflation Hurts:
Inflation Helps:
 Savers
 Those on fixed incomes
 Debtors
Fiscal Policy

Control of the money supply through government policies
 Contractionary Fiscal Policy (Tight Money)
 Increase Taxes
 Decrease Spending
 Expansionary Fiscal Policy (Easy Money)
 Decrease Taxes
 Increases Spending
Review Question

An expansionary fiscal policy would call for a:
A)deficit during a period of demand-pull inflation
B)surplus during a period of demand-pull inflation
C)deficit during a recession
D)surplus during a recession
Monetary Policy

Control of the money supply through the Federal Reserve Bank
 Open Market Operation
 Buying and Selling of government securities
 Reserve Requirement
 The amount of deposits that banks are required to keep on hand
 Discount Rate
 The interest rate at which the Fed loans money to member banks
 Federal Funds Rate
 The interest rate at which the Fed requires banks to charge EACH
OTHER for loans
Review Questions

 The group responsible for setting
policy on buying and selling
government securities (bills, notes,
and bonds) is the:
A)Securities and Exchange Commission
B)U.S. Treasury Board
C)Federal Open Market Committee
D)12 Federal Reserve Bank president
 Other things equal, a dramatic
decrease in the money supply
would:
A)increase the price level
B)reduce the purchasing power of
each dollar
C)increase the purchasing power of
each dollar
D)have an ambiguous impact on the
purchasing power of each dollar
Banks and Creation of Money

There are three types of money identified by the Federal Reserve:
 M1
 Most liquid
 Currency and checkable deposits
 M2
 M1 + Near-money savings, small time deposits, Money Market
Mutual Funds
 M3
 M2 + Large time deposits
Money Creation






Banks create money through loans
You make a deposit
The bank has a reserve requirement
The rest they can lend
By lending the rest, they have created “new money” that is in the
economy.
Not only is the money still in your account, but now it is loaned out
to someone else as well
Review Questions

Money is created when:
A)loans are repaid
B)the net worth of the
banking system is increased
C)banks acquire physical
capital
D)banks make additional
loans
In which of the following scenarios
is money created?
A)Johnson deposits her $2,000
weekly pay check at Morton
Bank
B)Morton Bank adds to its total
reserves held at the Federal
Reserve Bank
C)Johnson takes out a loan from
Morton Bank to purchase a new
car
D)Johnson repays her car loan