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GDP Know all terms on Business Cycle Where are we now? Long term growth trend of RGDP = 3% • • • • • • • • • • What are the problems/concerns on the downward slope? GDP? CPI? Unemployment? Solution? Government – Expansionary Fiscal Policy (Fiscal – of/or relating to govt.) Tools: Decrease Taxes / Increase Govt. spending {Goal?} Federal Reserve – Expansionary Monetary Policy Tools: Decrease Interest rates (increase money supply) {Goal?} GDP Long term growth trend = 3% • • • • • • • • • What are the problems/concerns near/at peak? GDP? CPI? Unemployment? Solution? Government – Contractionary Fiscal Policy Tools: Increase Taxes / decrease Govt. spending {Goal?} Federal Reserve – Contractionary Monetary Policy Tools: Increase Interest rates (decrease money supply) {Goal?} WHOWHATWHEN • • • • Who? Govt. or Fed Reserve What? (Tools?) (G spending or taxes [up or down]) or Interest Rates [up or down] • When? • When would the government and or fed. use the tools they have / under what circumstances? Economic Costs of Unemployment • Unemployment keeps society from reaching its PPF • Unemployment = lost output = “GDP Gap” = difference between Potential GDP and Actual GDP Okun’s Law • For every 1% unemployment above NRU • = 2.5% GDP Gap Actual unemp 7% - 5.5% = 1.5 % 1.5 x 2.5 = 3.75% gap NRU = 5.5% Actual unemployment • The unemployment of 7% created a 3.75% loss of GDP • Can have a “negative gap”