Download Macroeconomic Concepts Illustrate the means by which economic

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Macroeconomics
Macroeconomic Concepts
Illustrate the means by which economic activity is measured.
Explain that overall levels of income, employment, and prices are
determined by the spending and production decisions of households,
businesses, government, and net exports.
Define Gross Domestic Product (GDP), economic growth, unemployment,
Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and
aggregate demand.
Gross Domestic Product (GDP) – the market value of all final goods and
services produced in a calendar year within its borders.
Economic Growth – an increase in real output as measured by real GDP
or per capita real GDP
Unemployment – the number of people in the civilian workforce over
the age of 16 without jobs who are actively seeking work.
Consumer Price Index (CPI) – a price index that measures the cost of a
fixed basket of consumer goods and services, compares the costs
from other time periods and is used to measure inflation.
Inflation – a rise in the general or average price level of all goods and
services in an economy, (caused by demand-pull or cost-push)
Stagflation - a decline in real GDP combined with a rise in the average
price level
Aggregate Supply (AS) – the value of output (real GDP) that would be
produced at different price levels in a nation’s economy.
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Aggregate Demand (AD) - the value of output (real GDP) that would be
demanded at different price levels in a nation’s economy.
c. Explain how economic growth, inflation, and unemployment are
calculated.
Economic growth is measured by GDP, Inflation is measured by CPI,
the polling of 50,000 households to create an unemployment rate
(total unemployed divided by the total workforce)
Bureau of Economic Analysis- www.bea.gov (economic growth)
Bureau of Labor Statistics- www.bls.gov (inflation, unemployment)
d. Identify structural, cyclical, and frictional unemployment.
Structural Unemployment – skills of workers do not match up with the
skills required by employers. Technological is a type
Cyclical Unemployment – caused by the fluctuations in the overall rate of
economic activity or a phase in the business cycle.
Frictional Unemployment – some are always unemployed, often it is the
choice of the worker for a variety of reasons. Seasonal is a type.
e. Define the stages of the business cycle, include peak, contraction, trough,
recovery, expansion as well as recession and depression.
Business cycle – changes in the overall rate of national economic
activity with alternating periods of expansion and contraction,
varying in duration and severity and measured by real GDP
Peak – the height of economic expansion, real GDP stops rising.
Contraction – a period of economic
Decline Marked by falling GDP.
Unemployment increases
Trough – the lowest point in an
Economic contraction, real GDP
stops falling.
Recovery – the period following a
recession during which real
GDP rises. Unemployment decreases
Inflation pressures rise. The
beginning of expansion
Expansion – a period of economic growth
as measured by a rise in real GDP.
Recession – a decline in national economic activity, measured by a
decline in real GDP for at least two consecutive quarters (6
months).
Depression – a severe and prolonged economic contraction.
f. Describe the difference between the national debt and government
deficits.
National Debt – the public debt, all of the annual budgets deficits
added together.
Government Deficits – the government spends more money (expenditures)
in a fiscal year than it takes in (revenue) during that time.
Explain the role and functions of the Federal Reserve System.
a. Describe the organization of the Federal Reserve System.
Chairman, Board of governors, FOMC, 12 district banks.
b. Define monetary policy.
Monetary Policy – changes in the money supply, availability and cost of
credit set by the Fed to promote economic growth, price stability
and full employment.
c. Describe how the Federal Reserve uses the tools of monetary policy to promote price
stability, full employment, and economic growth.
Open Market Operations – the buying and selling of government securities (Tbonds, T-notes- T-bills) by the Fed. To increase money supply –
(expansionary policy) buy back bonds. This means more reserves in banks
that can be loaned out and then spent by consumers allowing businesses
to hire more people but results in higher prices.
To decrease money
supply – sell bonds (contactionary).
Discount Rate – the interest rate the Fed charges banks that borrow
money from the Fed. Expansionary- lower, contractionary- raise
Federal Funds Rate – the overnight lending interest rate between banks
utilizing federal funds (funds on reserve in a bank).
Reserve Requirements – the fraction of bank deposits required by the
Fed to be kept on hand. Banks must have this money (federal
funds) available in their vault. Expansionary- lower,
contractionary- raise
Explain how the government uses fiscal policy to promote price
stability, full employment, and economic growth.
a. Define fiscal policy.
Fiscal Policy – the spending (expenditures) and tax collection (revenue)
of the government to influence economic activity.
b. Explain the government’s taxing and spending decisions.
Government taxation – revenue raised through taxes to pay for
expenditures. Expansionary policy- lower, contractionary- raise
Government expenditures – goods and services purchased by the
government with tax revenues or borrowed money. Expansionary
policy- raised, contractionary- lower