Macroeconomics

What is GDP? What does it calculate?

GDP (Gross Domestic Product) reflects economic growth

→ Consumer Spending

→ Business Investment

→ Government Spending

→ Net Exports

Is GDP reliable?

Not always reliable

What is included in GDP?

→ New Homes

→ Sales IN the United States

What is NOT included in GDP?

→ Foreign Sales

→ Off the book

→ Home Gardens / Sales

→ Quality of Life

How do you calculate Nominal GDP?

WITH Inflation

→ New year each time

How do you calculate Real GDP?

NO Inflation

→ Only change quantity, NOT price

What is Inflation?

Price increase (income stays the same)

→ Reduces purchasing power

→ 1 - 3%

What is Positive Inflation?

Income is higher than the rate of inflation

Why does Inflation happen?

1.) Increase in money supply

2.) Scarcity of products

3.) Low interest rates

How does Inflation impact the purchasing power of consumers?

Decreases

→ Impacts fixed income, pension, government assistance

What is Stagflation?

Slow economic growth, high inflation

What is Hyperinflation?

100% Inflation (very high rates)

What is CPI? What is the purpose of CPI?

CPI (Consumer Price Index) measures inflation

How can the Government influence Inflation?

TAXES

• Decrease Supply → Increase Taxes

• Increase Supply → Decrease Taxes

How can the Federal Reserve influence interest rates?

Controls Money ($) Supply and Regulates Banks

How do you calculate the rate of Inflation?

[(current year - previous year) / (previous year)] x 100

→ If over 3% there is concern

Business Cycle

→ Increasing Line: Inflationary Gap

→ Decreasing Line: Recessionary Gap

→ Trough: Great Depression

What is the purpose of contractionary policies? Give Examples.

• Slow Economy → helps close inflationary gap

• Fiscal: Increases taxes, Decreases Government Spending, inflation decreases

• Monetary: Increases Interest Rates and RR (less $ open to public)

What is the purpose of expansionary policies? Give Examples.

Economic Growth

• Fiscal: Decreases taxes, Increases government spending

• Monetary: Low interest Rates, Low RR

What is the Fiscal Policy? Who is responsible for it?

What is the Monetary Policy? Who is responsible for it?