Economics - Unit 2: Fiscal and Monetary Policies and Global Economies

fiscal and monetary policy, business cycle, economic indicators, etc.

business cycle

the recurring pattern of expansion and contraction in the economy, characterized by increasing and decreasing economic activity and GDP growth

gross domestic product (GDP)

the total value of all goods and services produced within a country in a given period, serving as a measure of the country’s economic performance

how is GDP measured

consumption spending + investment spending + government purchases of goods and services + (export spending - import spending)

an increase means we are producing more “product” and are better off

unemployment rate

the percentage of the labor force that is unemployed and actively seeking employment, indicating the level of joblessness in an economy

how in unemployment rate measured

[U/(U + E)] * 100

U = number of unemployed individuals, E = number of employed individuals

an increase means more people are unemployed, financial challenges, marital problems, criminal activity

inflation

the general increase in prices of goods and services over time, leading to a decrease in the purchasing power of money

how is inflation rate measured

determine the percentage change in the CPI (consumer price index) from one month to the next or from one year to another

an increase means the price of goods and services is increasing

expansionary phase

a phase in the business cycle characterized by increasing economic activity and GDP growth, indicating a recovery from a previous contractionary phase

unemployment rate declines and inflation may rise

recovery

early part of the expansionary phase from the trough to when in breaks even with long term GDP

peak

the highest point of economic activity in a business cycle, representing the end of an expansionary phase and the beginning of a contractionary phase

contractionary phase

a phase in the business cycle characterized by the decreasing economic activity and GDP contraction, leading to a decline in overall economic output

unemployment rate rises, inflation pressures may fall

recession

when the contractionary phase lasts longer than 6 months or two cycles

trough

the lowest point in economic activity in a business cycle, marking the end of a contraction phase and the beginning of an expansionary phase

depression

when GDP falls to especially low levels and unemployment climbs to very high levels

economic indicator

statistics used to measure and analyze the performance of an economy (GDP, inflation rate, unemployment rate)

frictional unemployment

unemployment that occurs when people are transitioning between jobs or entering the workforce for the first time

structural unemployment

unemployment that occurs due to a mismatch between the skills of workers and the available job opportunities, often caused by technological advancements or changes in the economy

cyclical unemployment

unemployment that occurs as a result of the ups and downs of the business

demand-pull inflation

inflation that occurs when demand exceeds the available supply of goods and services, leading to an increase in overall prices

cost-push inflation

increase of costs of major inputs used throughout the economy, pushing up the average level of prices

costs of inflation

reduced purchasing power, uncertainty in the economy, and potential distortions in resource allocation

consumption spending

spending by households on good and services, reflecting the demand side of the economy and contributing to overall economic growth

investment spending

spending by businesses on capital goods and equipment, aimed at increasing production capacity and stimulating economic growth

per capita

per person or per capita basis, often used to measure economic indicators on an individual level to account for population differences

short run GDP

economy alternates between the upturns and downturns as measured by three economic factors: GDP, inflation rate, and unemployment rate

a business cycle will show a wavelike pattern

long run GDP

a business cycle will show an upward growth trend

fiscal policy

government decisions on spending and taxation that are intended to improve or maintain the economy, controlled by congress and the president

main sources of the government’s income

income tax, sales tax, corporate tax

what the government spends money on

services (police, healthcare, education), transfer payments, investments in the community

expansionary fiscal policy

tax rates decrease, government spending increases

multiplier effect

when the government increases spending or lowers taxes, people will have money to spend, which will then gets spent by the more people, increasing the effect of an expansionary policy compared to the original increase in spending

the less people save, the greater the effect

contractionary fiscal policy

tax rates increase, government spending decreases

crowding out effect

when there is a limited supply of resources, government investment is prioritized over private investment

monetary policy

the expansion or contraction of the money supply, controlled by the US Federal Reserve Bank

dual mandate

stable prices (keep inflation in control) and maximum sustainable employment

what are people incentivised to do when interest rates are high

leave money in the bank, as borrowing is expensive

what are people incentivised to do when interest rates are low

borrow more to invest into durable items (cars, etc.) due to money being cheap

how are interest rates and money supply linked

high interest rates lead to low money supply

low interest rates lead to high money supply

open market policy

central bank buys or sells government bonds to control the money supply

expansionary monetary policy

increasing money supply by buying bonds to deposit into banks

contractionary monetary policy

decreases the money supply by selling bonds

discount rate

interest rate the central bank charges other banks

reserve requirement

percentage of deposits banks must keep in reserve

five ways to invest

stocks, bonds, mutual funds/exchange traded funds (ETFs), real estate, and high yield savings account

stocks

represent ownership in a company

risks: prices fluctuate significantly, company can perform poorly

rewards: high potential returns through capital appreciation (increase in stock price) and dividends (profit sharing)

bonds

loans made to companies or governments

risks: interest rate increasing leads to prices falling, credit risk (issuer defaulting on payments)

rewards: generally stable returns through fixed interest payments, lower risk compared to stocks

mutual funds/exchange traded funds (ETFs)

pool money from many investors to invest in a diversified portfolio of stocks, bonds, and other assets

risks: management fees can reduce overall returns, market risk (the value of the fund can decline due to market downturns)

rewards: diversification reduces risk by spreading investments across assets, professionally managed (better decision making)

real estate

investing in physical properties

risks: takes time to sell, property values can decrease due to economic conditions

rewards: tangible assets with potential for long term appreciation, income generation through rent

high yield savings account

savings account that offers a higher interest rate than traditional saving accounts

risks: changing interest rates, inflation, withdrawal limits, fees, less growth potential compared to stocks

rewards: higher interest than a traditional savings account, safe investment, low minimums, compounding interest

federal minimum wage

$7.25

Porland minimum wage

$15.95

why is the cost of living different depending on where you live

prices of necessities are different from state to state, like for housing or transportation