Macro Econ exam 2

Economy definition

the structure of economic activity in a community, region, a country or a group of countries of the world

What is a gross product?

measures the market value of all final goods and services produced in a particular geographical region during a given period

Gross domestic product (GDP)

Measures the market value of all final goods and services produced within a country’s borders during a specific time period

What is the Medium of exchange for the national economy?

Money

What movement does money, products, and resources flow through the economy?

Circular flow

What are the components of the business cycle?

production, income, employment

What are the two phases of the business cycle?

Expansion and Recession

What are the boundaries of the business cycle?

Peak or trough

What’s a flow variable?

A measure of something per period of time, such as your spending per week

What is a stock variable?

A measure of something at a point in time, such as the amount of money you have with you right now

Expansion

A period during which the economy grows as reflected by rising output, employment, income, and other aggregate measures

Contraction

A period during which the economy declines as reflected by falling output, employment, income, and other aggregate measures

Depression

A severe and prolonged reduction in economic activity, as occurred during the 1930s

Recession

A period of decline in economic activity lasting more than a few months, as reflected by falling output, employment, income, and other aggregate measures

Inflation

An increase in the economy’s average price level

Why did production during 2022 compared to 1929 increase?

1. Increases in amount and quality of resources (esp in labor and capital);

2. better technology and knowledge

3. improvements in the rules of the game that facilitate production and exchange, such as property rights, patent laws, the legal system and market practices

What is the period between a peak and trough called?

contraction

What does the hypothetical business cycle look like?

What qualifies it as a recession?

Economic activity declines for more than two quarters or six months

What is long run economic growth?

Sustained upward trend in economic growth output over long periods of times

What was economics thought to be before the Great Depression?

Self regulating

What does a self regulating economy mean?

“invisible hand would resolve economic problems”. Price mechanisms would move resources to most valuable use

"Keynesian economics”

Proposed problem was lack of demand-inadequate spending. proposed gov intervention to address large swings in economic activity with monetary and fiscal policies

What are the early indicators or a recession?

Business slows down, orders for machinery and computers slip and stock market anticipating lower profits turns down.

coincident economic indicators

Variables that reflect peaks and troughs in economic activity as they occur; examples include employment, personal income, and industrial production

lagging economic indicators

Variables that follow, or trail, changes in overall economic activity; examples include the interest rate, the unemployment rate, and the average duration of unemployment

Monetary policy affects what?

money and interest rates

Fiscal policy affects what?

taxes and government spending

Deflation

decreasing overall level of prices

Disinflation

a reduction in the inflation rate

Inflation

rising overall level or prices

What were the characteristics of 19th century- Great Depression?

• stagnation

• no spending

• 
  

What were the characteristics of WWII-1970s?

What were the characteristics of 1970s-1980s?

stagflation

What were the characteristics1980s-(2007)/GCF?

What were the characteristics of GCF-Covid?

What were the characteristics of Post Covid?

Employment act of 1946

Imposed clear responsibility of government to promote max employment production and purchasing power

Council of Economic advisors

3 member team of economists who provide economic advice and report on the economy

Aggregate output

A composite measure of all final goods and services produced in an economy during a given period; real GDP

What’s the best measure of aggregate output?

real GDP

Aggregate demand

The relationship between the economy’s price level and aggregate output demanded, with other things constant

Price level

A composite measure reflecting the prices of all goods and services in the economy relative to prices in a base year

index number

the price level in any year

What are the four economic decision makers?

Households, firms, governments and the rest of the world.

Aggregate supply curve

A curve representing the relationship between the economy’s price level and real GDP supplied per period, with other things constant

What’s constant along the aggregate supply curve?

1. resource prices

2. the state of technology and know-how

3. rules of the game provide production incentive such as patents, tax rates and business practices

Why are higher levels of real GDP beneficial?

1. more goods and services become available in the economy

2. more people are employed

Open economy

economy that trades goods or services with other countries

closed economy

does not trade with other countries (autarky)

exports

goods and services a country sells to rest of the world

imports

goods and services a country buys from rest of the world

Trade deficit

imports>exports

Trade surplus

imports<exports

trade balance

net calculation of a countries exports minus imports indicating its economic relationship on an economic scale

national bureau of economic research (NBER)

place to get most of the time series data we use in this class

USA spending.gov

place to get most of the time series data we use in this class

tax policy center .org

place to get most of the time series data we use in this class

Federal reserve economic data (FRED)

place to get most of the time series data we use in this class

Great Recession and slow expansion 2008 - 2015

• expansion started in 2009

• output gap didn’t close until 2015

COVID-19 shock and aftermath

• fast deep recession

• massive policy response

• tax policy center summary

• inflation returns

Which organization produces the estimates of U.S. GDP?

U.S. bureau of economic analysis

Before and during the great depression

• recessions and depressions

• accompanied by falling price levels

• 1929 stock market crash

• investments cut

• consumer spending fell

• banks failed

• nation’s money supply shrank by one-third

• world trade severly restricted by high tariffs

• price level and real GDP

After Great Depression - 1970s

• strong economic growth

• moderate increase in price level

• WWII boosted employment

• fed gov spending increased

• employment act of 1946

• boom times to recessions

1970s-1980s

• high unemployment

• high inflation

• stagflation

• supply issues made prices soar

1980s-2007

• good economic growth on average

• moderate increase in price level

• supply side economics

• recession and unemployment up

• recession ended made growth

• employment grew

• 2001 made small recession

• tax cuts resulted in worse economy at end

2007-2009

• worst recession since Great Depression

• extremely high unemployment

• falling home prices

• flow of credit opened

1. $700 billion troubled asset relief program or TARP aimed at stabilizing financial institutions

2. the $787 billion American recovery and reinvestment act or stimulus bill aimed at increasing aggregate demand

• lots of job loss

covid19 →

• numerous supply side constrains

• logistical challenges

• most elevated inflation rates

• disruption in supply and demand

• prolonged unemployment

• increased inflation

• increased demand

• lack of supply

Employment act of 1946

imposed clear responsibility on fed gov to promote max employment production and purchasing power

stagflation

A contraction, or stagnation, of a nation’s output accompanied by inflation in the price level

supply side economics

Macroeconomic policy that focuses on a rightward shift of the aggregate supply curve through tax cuts or other changes to increase production incentives

value added approach of calculating GDP

summing up value added at each stage of production

Expenditure approach of calculating GDP

add up spending on all goods and services produced in economy during the year. Consumption + investment + government + (value of exports — imports) = aggregate expenditure = GDP