Unit 4 - Macro Economics Stephens

unit 4 study guide

aggregate

aggregate

total of all (sum of all)

expansions

increased economic growth

(rising up on the business cycle)

(where we want to be)

peak

economic growth levels off

(tip of the business cycle)

contraction

decreased economic growth

(going down on the business cycle)

trough

recovery period

(bottom of the business cycle)

recessions

6 month decline in real GDP

inflation

increasing prices for goods and services

(normal in a growing economy)

US economic goals

1 - growth

2 - low unemployment rates

3 - stable prices

Federal Reserve Act

created the federal reserve bank

(1913)

(FED)

federal reserve bank

• board of governors

  • 7 individuals nominated by President and approved by congress

• district banks

  • 12 banks, 12 districts

  • we live in district 7

economic indicators

• GDP

• unemployment rate

• consumer price index (CPI)

GDP

measures the total value of all domestically produced goods/services

GDP equation

GDP=C+I+G+NX

c - consumer spending

I - investment (business)

G - government

NX - net exports (exports-imports)

real numbers

numbers adjusted for inflation

nominal numbers

numbers not adjusted for inflation

base year

equal to 1 or 100

used for chained dollars

chained dollars

$ chained into a base year

labor force

population 16 and older

unemployed population

16 or older actively seeking however unable to find employment

unemployment rate equation

unemployment rate=unemployed people/labor force

unemployment rate uses

• used as a major indicator of the business cycle

low unemployment rate

lower unemployment suggests expansions

high employment rate

rising unemployment suggests contractions

frictional unemployment

normal, people between jobs

structural unemployment

normal, unemployed because of market changes

seasonal unemployment

normal, expected due to seasonal changes

cyclical unemployment

caused by a downward movement in the business cycle, during a recession

natural unemployment rate equation

natural unemployment=frictional unemployment + structural unemployment

unemployment measuring

• the Bureau of Labor Statistics calculates this every month, gets media coverage

• unemployment in April 2023 was 3.4% (relatively low)

deflation

decrease in prices for goods and services

• usually caused by overproduction or decreasing demand

• not good long term for an economy

purchasing power

the ability to purchase goods and services with your $

• inflation causes decrease

groups harmed by inflation

• fixed incomes

• savers

• lenders

groups helped by inflation

• some investors

• borrowers

demand pull inflation

will happen when aggregate demand increases

• increase in money supply

cost push inflation

will happen when productive resources increase in price

• productive resources (land, labor, capital)

• inflation causes inflation

hyperinflation

excessive and increasing out of control, typically defined as 50% increase each month

consumer price index (CPI)

standard measurement of inflation

• calculated by the Bureau of Labor Statistics

market basket

survey of prices of goods and services for atypical urban consumer (1982-84)

• products everyone would use (milk, eggs, gas)

how countries control inflation

decrease the money supply, not popular for consumers/workers

• monetary policy, fiscal policy

monetary policy

decrease money supply (Federal Reserve Bank)

• used to control inflation

fiscal policy

increasing taxes

• used to control inflation

how countries deal with recessions

add money into circulation

• lower interest rates

  • rates which banks loan money to the public

• open market operations

  • buy bonds

• lower reserve ratio

  • lowers money banks are required to hold

business cycle

expansion, peak, contraction, trough