Econ Unit 3 Vocabulary - Economic Indicators and Fiscal Policy

Three Macroeconomic Goals

Economic Growth, Price Stability, and Full Employment

Steady Economic Growth

entrepreneurship, firm productivity, productive resource availability

Nominal Gross Domestic Product (GDP)

the market value of all final goods and services produced within a nation in a given time period

GDP Formula

C + I + G + (X-M)

Consumer Spending (C)

refers to the monetary value of what households spend on final goods and services in the product market in a given time period

Investment (I)

includes the monetary value of final capital goods businesses purchased in a given time period, the value of inventories produced by businesses, but not yet sold, by the end of the measurement time period, and the value of new home construction produced in the given time period

Government Spending (G)

the monetary value of any spending on final goods and services by a local, state, or national government in a given time period 

Net Exports (X-M)

refers to the monetary value of all final goods and services exported by one country minus the monetary value of all final goods and services imported by one country in a given time period

Real GDP

value of current GDP adjusted for inflation, more accurate, used to calculate growth

Not Counted Towards GDP

Black market goods, second hand goods, imports, transfer payments, intermediate goods, and financial transactions

Transfer Payments

social security

Intermediate Goods

goods that make final goods

Financial Transactions

stocks, bonds, and retirement accounts

Price Stability 

minimizing increases in the price level over time so that a country’s money will retain its purchasing power over time

Consumer Price Index

measures the change in value of a basket of goods and services purchased by the average urban consumer

Inflation

a sustained increase in the price level in an economy over time

Groups affected by price changes

borrowers and lenders 

Borrowers

take out loans

Lenders

give out loans

Price of Borrowing Money

interest charged over the life of the loan

Tools for Economic Growth

nominal & real GDP

Price Stability Tools

CPI and inflation

Full Employment Tools

unemployment rate

Helped by Inflation

borrowers (government), renters/leasers 

Hurt by Inflation

lenders, savers, retirees, people with fixed incomes

Full Employment 

the state of the economy when virtually all who are willing and able to work have the opportunity to do so

Unemployment Rate Formula

number of unemployed / total labor force x 100

Excluded from Labor Force

anyone under 16, full time students, institutionalized, anyone who hasn’t applied for a job in the last 6 months, stay at home parents, and retirees

Four types of Unemployment

Structural, Cyclical, Frictional, and Seasonal

Cyclical Unemployment

due to a downturn in overall economic activity (recession), uncommon

Frictional Unemployment

when people are graduating from high school or college, looking for better working conditions, or seeking a higher wage, most common

Structural Unemployment

when people are unemployed because their human capital does not match the needs of employers hiring in the labor market, or they get replaced by technology (fired), common

Seasonal Unemployment

a subcategory of frictional, when people are unemployed because their employers need their type of human capital during only one part of the year, common

Business Cycle

an economic model illustrating how economic activity fluctuates over time

Four Phases of the Business Cycle

Expansion (Growth), Peak (Boom), Contraction (Recession), Trough

Expansion (Growth)

the economy is growing, Real GDP is increasing, Price level is increasing, and unemployment is decreasing

Peak (Boom)

the economy had reached its highest point, leads to a  contraction, Real GDP is at its highest, Price level is at its highest, and unemployment is at its lowest 

Contraction/Recession

when Real GDP declines 6 consecutive months, real GDP is decreasing, Price Level is decreasing, and unemployment is rising

Trough

the economy is at its lowest point, Real GDP is at its lowest, Price level is at its lowest, and unemployment is at its highest, always leads to an expansion

Government’s Budget

based on how much money it will spend compared to how much money it will take in through taxes

Fiscal Policy

government like the Fed use fiscal policy to promote price stability during times of inflation and employment during times of contraction

Fiscal Policy Tools

changes in government spending and changes in taxes

Federal Fiscal Policy

refers to legislation passed by Congress and signed into law by the President, changing levels of taxation and/or government spending to stabilize the economy

Two Types of Fiscal Policy

Contractionary Fiscal Policy and Expansionary Fiscal Policy

Contractionary Fiscal Policy

when the economy is growing too fast, during a time of increasing price level, the government may decide to pursue contractionary fiscal policy to curb inflation

Contractionary Fiscal Policy**

when the economy experiences a recession, when the government wishes to promote full employment and economic growth at a time when a price level is not a concern, it will use fiscal policy tools designed to increase consumption and investment spending in the economy

Expansionary Policy used during Recession

Decrease Taxes, Increase Government Spending

Contractionary Policy used during Inflation

increase taxes, decrease government spending

Government Income Sources

Taxes and Fees

Expenses

includes all the public goods and services provided by the government as well as the interest payments the government pays on its debt

Surplus

exists when the amount of income received exceeds the amount of expenses paid (subtracts from the deficit)

Deficit

exists when the amount of income income received falls short of the amount of expenses paid