Download Notes on Economics

Economics Notes for U. S. History
Economics - the study of the use of resources to create and distribute goods and services.
Supply and Demand - Price is a result of the pressures of supply and demand. Demand refers to how much
buyers want a product or service. Supply refers to the amount of a product or service the market can offer. The
relationship between how much of a good or service is supplied to the market and how much people want the
product determines the price of the product.
Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a
national economy as a whole. To do this, economists quantify aspects of the economics process using economic
aggregates. The breakdown of aggregates of economic activity can be predictors of future economic
performance.
Aggregates = Averages (Median) that measure economic activity.
GNP – Gross National Product – the total of all production for American businesses, inside or outside of the
country.
Factors that affect GNP:
 Population Expansion or contraction
 Entrepreneurism (the creation of new products and services)
 Trade
 War
 Natural Resources
Origins of supply (aggregates)
 Manufacturing
 Construction
 Agriculture, fisheries and natural resources
 Transportation, communication and utilities
 Wholesale and retail
 Finance, insurance services and Real Estate
 Other services (doctors, lawyers, etc.)
Other Aggregates:
 GDP – Gross Domestic Product – the total production inside the United States for all businesses from
all countries.
 Aggregate Demand – percentage of income that people spend instead of saving or investing.
 Unemployment – the number of people without jobs
 Inflation/Deflation – the change of prices for goods and services over a period of time.
Speculation - the act of buying something at a low price in the hope of reselling it later at a profit.
Gold Standard - holding enough precious metals in reserve to equal the value of paper money in circulation.
Recession – Contraction in the business cycle or a general slowdown in economic activity indicated by two
consecutive quarters of negative growth as measured by a country's gross domestic product.
Depression – Severe Economic downturn where real GDP declines by more than 10 percent.
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Economics Notes for U. S. History
Governments can influence the economic performance of a country in mainly two ways:
1. Monetary Policy – can be controlled through printing currency and interest rates.
The Federal Reserve Board, appointed by the President of the United States, oversees the actions of the
Federal Reserve Banks and sets the interest rate which banks must pay to borrow money from the Fed. The
Federal Reserve’s power to set interest rates enables it to control the nation’s money supply. If the Federal
Reserve Board believes the American economy is slowing down, it will cut interest rates and thereby encourage
borrowing. On the other hand, if the Federal Reserve Board believes the economy is overheating and thereby
causing inflation, then it will raise interest rates. (Inflation means prices increase, and the dollar buys less.)
2. Fiscal policy – the tax policy (revenue) and budget (spending) of the government. Spending more in the
budget than collected in revenues/taxes creates a deficit. The deficit is money that must be borrowed and is
therefore added to the National Debt, which all the money owed by the government. Spending less in the
budget than collected in revenue/taxes creates a surplus.
Two schools of Economic Theory:
Keynesian – John Maynard Keynes (Keynes influenced Franklin Delano Roosevelt – New Deal)
An economic theory stating that active government intervention in the marketplace and monetary policy is the
best method of ensuring economic growth and stability. A supporter of Keynesian economics believes it is the
government's job to smooth out the bumps in business cycles. Intervention would come in the form of
government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax
hikes in good times, in order to curb inflation.
Austrian – Frederick A. Hayak (Milton Friedman influenced Ronald Reagan – Reaganomics – Supply-sideTrickle down)
Austrians view entrepreneurship as the driving force in economic development, see private property as essential
to the efficient use of resources, and often see government interference in market processes as
counterproductive. The Austrian school holds a special view of the modern business cycle; it contends that
boom cycles are actually a misallocation of capital resources caused by interfering monetary policy. When
central banks effectively expand the money supply by lowering interest rates, it creates a multiplying effect in
the economy. This leads business owners to incorrectly assess the amount of available capital and the level of
demand by consumers. Eventually, overinvestment by corporations leads to a "bust" cycle in which prior
misallocations must be worked out.
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