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total value Gross Domestic Product (GDP) - ________________of all goods and services __________________________ produced in a country in __________ 1 year 6 months decline Recession - __________in real GDP lasting for at least _____________ recovery Expansion - period of _______________from a _________________ recession measure price changes Consumer Price Index (CPI) - used to _______________________ for market basket of goods general prices Inflation - rise ___________in the __________________level of ______________ average price decrease Deflation – _________________in the ______________________of goods and services Stagflation - ____________________of stagnant economic _______________ growth combination inflation and _____________________ ratio unemployed Unemployment rate - ______________of _________________individuals divided by total # of ________________in ____________________ people the workforce I. Measuring Economic Activity GDP A. Gross Domestic Product – ______ 1. __________ Total value of all ________ FINAL goods and services. Example: There is no need to count the output of the steel industry, which is an "intermediate" input, because the value of the steel will be counted in cars, refrigerators, buildings and all the other final uses of steel. healthier 2. More goods & services = ___________economy (usually) GDP/Population 3. Per capita GDP: ______________________ http://www.slatev.com/video/what-exactly-gdp/ Inflation is an increase in the average price level in the economy. A positive rate of inflation does not mean that every single price increases, nor that all prices increase by the same amount, nor that the price of some goods didn't fall. It represents an average price increase for the goods and services in the economy. CPI B. Consumer Price Index – _____ 1. CPI measures changes in prices. 2. It uses a “market basket” of goods and services to compare prices from one time period to another. 3. Changes in the CPI are used to measure inflation. 2010: Feast for 10 = $43.47 4. Small amounts of inflation are good as it produces higher profits which increase employment. 5. When deflation occurs, then less profits are made and employment decreases. 6. Stagflation – prices and unemployment decrease. 2011: Feast for 10 = $49.20 http://www.npr.org/templates/story/story.php?storyId=5568606 Alternating growth and Business cycle – __________________ periods of __________ ________________in an economy recession recovery Expansion - period of _________________from a recession highest Peak - point where GDP stops going up; GDP is at its _________ Trough - point in time when real GDP stops declining and lowest begins to expand; DGP is at its ____________ 6 months Recession - Decline _____________in real GDP lasting for at least _________ recession a long time Depression – ____________that lasts ___________________and causes drop a severe _________in GDP II. Trade and Employment A. Net Exports Imports Exports ______ total # of ___________ 1. total # of ___________ trade deficit 2. U.S. - negative net export (_______________) 3. more ____________= more $ flowing __________ exports INTO the economy 4. more exports = the economy increase 5. more __________= imports more $ goes ________ OUT 6. ___________net exports = signs of a ___________ growing economy Positive III. The Business Cycle (ups / downs) A. Four Main Parts 1. Peak – high production; prices increase; high profit; inflation occurs; low unemployment 2. Recession (contraction) – production lowers; prices begin to drop; declining profits; unemployment rising 3. Trough – production, prices, and profits at their lowest; unemployment at its highest 4. Expansion (recovery) – production, prices, and profit increases; unemployment decreases; tax breaks *____________recession decline in GDP for 6 months or more depression extended period of time *____________- To say that net exports is negative is the same as saying that a. there is a capital investment deficit b. there is a trade deficit c. the exchange rate has depreciated d. there is a trade surplus Which of the following might be a sign of economic trough? a. low unemployment b. recession c. high GDP d. stable CPI The Consumer Price Index (CPI) is an indicator of .... a. the size of an economy b. the velocity of money c. the level of inflation or deflation d. the presence of a budget deficit or surplus The total value of all final goods and services produced in an economy is called the a. consumer price index b. business cycle c. net exports d. gross domestic product Consumers reduce spending because of a lack in confidence in the economy and the possibility of future unemployment. All else being equal, what effect will this have on the price level and GDP? a. both price and GDP will decline b. prices will increase; GDP will be the same c. both prices and GDP will increase d. prices will decrease, GDP will be unaffected Gross domestic product is a method of calculating how much a country produces by adding which four spending categories? a. wages, rent, interest, dividends b. consumption, investment, government, net exports c. consumption, investment, government, business expenditures d. consumption, interest rates, government, net exports W - Peak X - Recession Y - Trough Z - Recovery Trough Recession Recovery Peak IV. Unemployment A. Unemployment rate labor force 1. % of total _____________________not working 16 like to work 2. labor force = over _____who would ______________________ 3. not counted: mentally incapable a) _____________________ physically incapable b) _____________________ c) choose not to work (___________________________) stay at home parent B. Types of Unemployment Cyclical business cycle 1. ________________based on the economy (__________________) higher i.e. - recessions = _______________ unemployment lower expansion = ____________ unemployment ex- home builders; mortgage lenders Structural Complete shifts 2. _____________________________________________in the economy i.e. - jobs not coming back or limited ex - grocery store clerks; typewriter repair; telephone operator Frictional 3. ________________________period between jobs i.e. - many factors why this happens ex - college graduate; being fired; voluntarily leaving Seasonal 4. ______________________changes throughout the year ex - lifeguard; ski instructor; construction worker; retail stores In your notes, write the type of unemployment represented in each picture. Stephanie who is a veterinarian does not like her boss. She decides to leave her job and starts looking for another clinic. What type of unemployment is she experiencing? a. seasonal b. frictional c. structural d. cyclical Unemployment that occurs as a result of a recession or an economic downturn is a. seasonal b. frictional c. cyclical d. structural An ice delivery person during the 1930s is no longer needed. Technology in freezers have made this job obsolete. What type of unemployment is this? a. seasonal b. cyclical c. frictional d. structural A concrete worker in Duluth, Minnesota does not work during the winter months, because the moisture from the snow will not allow the concrete to cure. What type of unemployment is this? a. seasonal b. cyclical c. frictional d. Structural _______________________________Aggregate Demand total quantity of goods/services demanded at different price levels Aggregate Supply ______________________________total value of all goods/services that all firms would produce The Federal Reserve (Fed) _______________________________________central bank of the United States Monetary Policy ___________________________________actions by the Federal Reserve to expand or contract the money supply Federal Open Market Committee (FOMC) – part of the Fed ____________________________________________ that regulates money supply by buying or selling government securities Reserve requirement __________________________________formula used to compute the amount of a bank’s required reserves “Tight money” policy _______________________________policy resulting in higher interest rates & restricted access to credit “Easy money” policy ______________________________policy resulting in lower interest rates & greater access to credit Open Market Operations ________________________________– the Fed buys and sells gov’t bonds in order to regulate money supply Discount Rate ________________________________- interest rate that the Fed charges on loans to banks • Monetary policy involves regulating the money supply, banks and the overall financial system. Monetary policy is conducted by a central bank which in the United States is called the Federal Reserve. • When the economy is in a recession central bank officials will use expansionary monetary policy which seeks to reduce interest rates by expanding the supply of money in the economy. • In turn, the lower interest rates will encourage additional aggregate demand for consumption and investment, and thus help shorten or end the recession. • When an economy is experiencing inflation central bank officials will use contractionary monetary policy, which seeks to raise interest rates by contracting (or reducing the rate of growth in) the money supply. V. The Federal Reserve System A. The 'Fed' 1. fiscal vs. monetary policy Central bank 2. _________________for the US 3. owned by _______________ government B. Monetary Policy money supply 1. control of the _______________ inflation 2. control ____________(price stability) consumer spending 3. encourage ___________________ 4. motivation to ______________ save C. Organization of the Fed 1. independent of 3 branches -annual report to _______________ Congress Board of Governors 2. headed by _____________________ Ben Bernanke -chairman: ______________________ the President -appointed by ________________ FOMC 3. Federal Open Market Committee (________) -oversee open market operations 12 Regional 4. ______________banks Member 5. __________ banks D. Monetary Policy (3 tools) Reserve Requirement money 1. ______________________________ required for keep banks to ______on hand rather than _____________ loan to customers reserve loan out - % set by Fed (10% __________, 90% ___________) - least used tool higher less - __________reserve requirement = ______in circulation - i.e. ‘__________money' policy tight more - ________reserve requirement = ______in circulation lower - i.e. ‘_______money' policy easy Discount Rate Interest rate that banks 2. _______________(window) - __________ pay the Fed to borrow $ Bank for banks - Fed is a “_____________” People/businesses borrow from banks (interest rate) - ________________ - _________ discount rate = __________interest rates higher higher higher - ________interest rate = ______saving; _____borrowing more less higher decrease - _________interest rate = ___________in $ supply - ________________________ “tight money” supply 3. _______________________sale or purchase of US Open Market Operations treasury __________________ Bonds (aka T Bills) - ___________= 'I.O.U' investment Bond lowers sells - Fed _____securities (bonds) = ________money supply i.e. - ______$ is invested and _______is spent in the more less rises market discount rate ________along with __________rates interest - Fed _______securities = ‘______money' policy tight selling buys -Fed _______securities = puts $ into economy i.e. ‘_______money' policy easy 'tight money' policy: G H J 'easy money' policy: F I K Tools of the Federal Reserve System (Monetary Policy) Boost the Economy = ____________ buy bonds lower ____________ interest rates (bank to consumer) lower ____________ reserve requirement (last resort) ____________ discount rate (the Fed to banks) lower sell Cool off the Economy = ___________ bonds higher interest rates (bank to consumer) ___________ higher reserve requirement (last resort) ___________ higher discount rate (the Fed to banks) ___________ Board of Governors Federal Open Market Committee 12 Regional Federal Reserve Banks Numerous Member Banks Review of Monetary Policy lessen -Increase in interest rates = ______________ money supply decrease money supply -Federal Reserve selling gov't securities (bonds) = ____________ increase -Decrease in the reserve requirement = ______________ the money supply -Money supply increases if interest rates ______________. decrease decrease -Increase in the discount rate = money supply to _________________. buys securities on the open market -Money supply increases if the Fed __________ increase -Increase in the money supply will lead the discount rate to _______________. increase -Decrease in the money supply if the reserve requirement _______________. When the Fed lowers the discount rate a. interest rates rise b. interest rates fall as well c. banks loan less money d. people save more The Fed wants to pump more money into the economy in an effort to stimulate economic growth. Which of the following actions could the Federal Reserve take to increase the money supply? a. raise the discount rate b. raise the reserve requirement c. sell securities (bonds) d. buy securities (bonds) Which of the following is a monetary policy that might be used to reduce inflation? a. decreasing taxation b. decreasing the discount rate c. open market selling of bonds d. increasing government spending To stimulate the economy, the Fed decides to increase the amount of money in circulation. Which of the following actions will they be MOST LIKELY to take? a. raise the reserve requirement b. raise the discount rate c. sell bonds d. lower the reserve requirement Which of these correctly completes the chart of the Federal Reserve System? A. Federal Reserve Chairman B. Federal Open Market Committee C. President of the United States D. Federal Deposit Insurance Corporation VI. Aggregate Supply and Demand all products supply - AS - ________ of _______________ all products demand - AD - ________of ________________ Overall price level determined by AS and AD Macroeconomic equilibrium 1. AS = AD is ___________________ Surplus 2. AS exceeds AD = _________ Prices drop i.e. overproduction = __________ Shortage 3. AD exceeds AS = ___________ inflation i.e. prices rise = ___________ healthy 4. If AS = AD, considered a ________ economy When aggregate supply exceeds aggregate demand, what most likely happens to prices in the market? a. increase b. market equilibrium c. decrease d. inflation When aggregate supply increases, what most likely happens to prices and output in the market? a. increase, increase b. increase, decrease c. decrease, decrease d. decrease, increase When aggregate demand increases, what most likely happens to prices and output in the market? a. increase, increase b. increase, decrease c. decrease, decrease d. decrease, increase