Economics Unit 3

What is Gross Domestic Product (GDP)?

Dollar value of all goods, services, and structures produced during a one-year period.

What is Real GDP?

Output is measured using a base price to adjust for inflation.

What is Per Capita GDP?

Measure of the amount of output per person (calculated as Real GDP divided by population total).

What is the Business Cycle?

Recurring changes in GDP marked by ups and downs.

Explain and graph the different parts of the business cycle.

The business cycle maps fluctuations of Real GDP over time: Trough, Expansion/Recovery, Peak, Recession, Growth Trend

Trough

Lowest point of economic contraction.

Expansion/Recovery

Period where Real GDP rises steadily.

Peak

Highest point of economic growth.

Recession

Constant, sustained decline of Real GDP.

Growth Trend

Straight, upward line showing long-term economic expansion.

Explain the impact on economic indicators like inflation, unemployment, GDP, and interest rates during Expansion.

Real GDP goes up, unemployment falls (due to business growth), spending increases, inflation goes up, and interest rates rise to cool over-expansion.

Explain the impact on economic indicators like inflation, unemployment, GDP, and interest rates during Peak.

Real GDP reaches its maximum level, unemployment hits its lowest point, inflation is typically at its highest, and interest rates are high to stop overheating.

Recession

Real GDP goes down, unemployment goes up (due to lower production), spending drops, inflation goes down, and interest rates decrease to encourage economic activity.

Trough

Real GDP hits its absolute lowest bottom, unemployment peaks at its highest level, inflation reaches its lowest point, and interest rates are kept low to jumpstart borrowing and investment.

What is a Bull Market?

A financial market condition where stock prices are steadily rising or expected to rise, reflecting strong investor confidence and economic growth.

What is a Bear Market?

A financial market condition where stock prices experience a sustained and widespread decline, typically falling 20% or more from recent peaks amid economic slowdown or pessimism.

What is a Recession?

Period of constant decline of the GDP. During this time, production and values tend to decrease, unemployment goes up, inflation goes down, and interest rates decrease to encourage economic activity and investment.

Justify life decisions using economic data and the business cycle buying a house v renting

Rent at a "Peak" when housing prices and interest rates are artificially high; buy during a "Trough" or recovery when prices and financing costs drop.

Justify life decisions using economic data and the business cycle getting a loan v paying cash

Cash saves the most money by avoiding interest. However, getting a loan is justified if the loan interest rate is low (e.g., 4%) and you can earn higher returns (e.g., 8%) by investing that cash instead.

Justify life decisions using economic data and the business cycle going to grad school v getting a job

Go to grad school during a "Recession" because high unemployment lowers the opportunity cost of leaving the job market, allowing you to graduate with skills right as expansion begins.

What is CPI?

Consumer Price Index; an economic indicator that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, used to track inflation.

What is Demand-Pull Inflation?

Inflation that occurs when aggregate demand for goods and services increases faster than aggregate supply, often described as "too many dollars chasing too few goods," pulling prices upward.

What is Cost-Push Inflation?

Inflation that occurs when the overall costs of production increase (such as rising wages or raw material costs), pushing up the price level even if aggregate demand remains constant.

Explain and graph the difference between demand-pull and cost-push inflation.

Demand-Pull: Driven by consumers. Aggregate Demand increases faster than supply. Graphically, the Aggregate Demand (AD) curve shifts right, pulling output and prices up.

Cost-Push: Driven by producers. Higher production costs cause businesses to supply less. Graphically, the Short-Run Aggregate Supply (SRAS) curve shifts left, driving prices up while shrinking output (causing stagflation).

What is Unemployment?

A state in which individuals who are part of the total labor force are actively looking for work but are unable to find a job. It does not include military, homemakers, volunteers, full-time students, people in prisons or mental health facilities, or anyone not looking for work.

What is the Unemployment Rate?

The percentage of the total labor force that is unemployed (calculated as the number of unemployed individuals divided by the total labor force).

What are the Types of Unemployment?

Frictional, Seasonal, Cyclical, Structural, Technological

Frictional

Workers between jobs (short term).

Seasonal

Caused by changes in weather or temporary product demand (short term).

Cyclical

Caused by downturns in the business cycle/recessions (short term).

Structural

Deeper structural removal of a type of job from the economy (long term).

Technological

Workers with less skill are replaced by machines/automation (long term).

Justify and apply how understanding how unemployment rate could be applicable to my life now or at some point in the future.

Monitoring spikes tells you when competition for jobs is high, allowing you to prioritize job security and build an emergency fund.

Justify and apply how understanding how CPI could be applicable to my life now or at some point in the future.

If CPI indicates inflation is rising faster than your wages, you can use this data to budget for higher costs or negotiate an inflation-adjusted salary raise.

What is Fiscal Policy?

Government policies controlled by Congress that affect economic growth through Taxes and Government Spending to fund operations and encourage growth.

What is Demand-Side Fiscal Policy (Keynesian)?

An increase in the role of government in stopping the downward fall of the business cycle through government spending and taxes. It focuses on achieving economic growth through the government's influence on aggregate demand.

What is the Multiplier Effect?

The rippling action where government spending puts people to work and each dollar spent encourages still more spending.

What are Automatic Stabilizers?

Government programs (like Unemployment insurance or SNAP/Food Stamps) that automatically reduce taxes and increase government spending during a recession without needing new legislation.

What is Supply-Side Fiscal Policy (Trickle-Down)?

Policy that focuses on Producers, Businesses, and Wealthy Individuals. It advocates lowering tax rates on the wealthy and businesses, deregulating industry, and shrinking federal agencies to increase incentives to create new businesses, expanding production, and creating jobs.

What is Deregulation?

The reduction or elimination of government regulations on industries, making it easier for businesses to expand and increase incentives to create new enterprises, though it may carry risks like negative environmental externalities.

What is the Laffer Curve?

An economic graph showing the relationship between tax rates and government revenue, suggesting that cutting excessively high tax rates can incentivize economic activity so much that it expands the tax base and can potentially maintain or increase revenue.

Explain how supply-side and demand-side fiscal policy differ in how they will address economic conditions like unemployment, inflation, and economic growth.

Demand-Side: Targets consumers. Tackles recessions by putting cash into the hands of the working class (via stimulus or safety nets) to shift aggregate demand rightward. Risk: Can trigger demand-pull inflation.

Supply-Side: Targets producers. Tackles stagnation by cutting corporate taxes and regulations to lower production costs, incentivizing businesses to expand factories and hire workers, which shifts aggregate supply rightward.

Justify when demand-side fiscal policy might be most appropriate when dealing with a specific economic situation.

Demand-Side is best during a severe financial crash where consumer spending plummets and cyclical unemployment spikes. Giving stimulus checks directly to consumers stabilizes demand because cutting corporate taxes won't force businesses to hire if they have no customers.

Justify when supply-side fiscal policy might be most appropriate when dealing with a specific economic situation.

Supply-Side is best during structural stagnation where domestic businesses cannot grow due to high tax rates and heavy regulatory compliance burdens. Deregulation and tax cuts give producers the immediate incentive to invest in capital, expanding long-term output.

What is Monetary Policy?

Regulating the availability of money supply and adjusting interest rates, controlled by the Federal Reserve, to encourage or discourage borrowing and control inflation.

What is the Federal Reserve?

The central banking system of the United States, governed by appointed officials, which independently conducts monetary policy to stabilize the economy.

What is Expansionary Monetary Policy?

Actions taken by the Federal Reserve to increase the money supply and lower interest rates to encourage borrowing, consumer spending, and investment to combat economic slowdowns.

What is Contractionary Monetary Policy?

Actions taken by the Federal Reserve to decrease the money supply and raise interest rates to discourage borrowing and slow down economic growth to control and prevent high inflation.

Explain the difference between fiscal and monetary policy and when each is expansionary or contractionary.

Fiscal Policy: Managed by Congress via Taxes and Government Spending. It is expansionary when cutting taxes and increasing spending, and contractionary when raising taxes and slashing spending.

Monetary Policy: Managed independently by the Fed via Interest Rates and Money Supply. It is expansionary when increasing the money supply and lowering interest rates, and contractionary when shrinking the money supply and raising rates.

What is the Discount Rate?

The interest rate that the Federal Reserve charges commercial banks for short-term loans.

What are Open Market Operations (OMOs)?

The buying and selling of government securities (bonds) in the open market by the Federal Reserve to control the volume of bank reserves and money supply.

What is the Fractional Reserve System?

A banking system in which commercial banks are required to hold only a specified fraction of their depositors' funds as physical reserves, allowing them to lend out the remainder to create money in the economy.

Explain the primary tools used by the federal reserve in managing the supply of money in society and how they would use each to contract or expand the economy. (Discount rate)

To expand, the Fed lowers the rate to make bank borrowing cheaper (lowering market rates); to contract, it raises the rate to make borrowing expensive.

Explain the primary tools used by the federal reserve in managing the supply of money in society and how they would use each to contract or expand the economy. (OMOs)

To expand, the Fed buys government bonds, injecting liquid cash reserves into banks; to contract, it sells bonds, pulling cash out of bank circulation.

Fractional Reserve System

To expand, the Fed lowers the required reserve ratio so banks can lend out more of their deposits; to contract, it raises the ratio, locking cash in bank vaults.

Justify why a specific monetary tool would be effective at dealing with a specific economic situation.

If inflation is rapidly rising during an overheating expansion, selling government bonds via Open Market Operations (OMOs) is highly effective. Selling bonds drains cash reserves directly out of commercial banks. With less money available to lend, banks must raise consumer interest rates. This immediately cools down credit card spending and pauses business expansions, reducing demand-pull inflation.

What are Progressive Taxes?

A tax structure where people who earn higher incomes pay a higher percentage of their income in taxation.

What are Proportional Taxes?

Everyone pays the same percentage of their income (also known as a Flat Tax; corporate income tax is a standard example).

What are Regressive Taxes?

A tax structure where people who make less income pay a higher percentage of their overall income in taxation (examples include Sales tax and Property tax).

Produce a presentation identifying two economic indicators and how I could use both monetary and fiscal policy to move those indicators in my desired direction.

• Fiscal Action (Congress): Increase government infrastructure spending to create jobs and cut personal income taxes to boost consumer spending.

• Monetary Action (The Fed): Lower the discount rate and buy government bonds via OMOs to drop market interest rates, making business borrowing cheap so firms expand and hire.

Explain how to build credit and how having good credit can be beneficial.

Open a single credit card, use it strictly for planned, budgeted everyday expenses, and pay the entire balance off on time and in full every single month.

Benefits: Proves to lenders you are a reliable borrower. It grants you access to large institutional loans needed for life milestones (buying a house, car, or business) and qualifies you for the lowest possible interest rates, saving you thousands of dollars.

Explain how different types of loans and payment plans will save or cost me money.

Paying cash upfront always saves the most money by avoiding interest fees. To minimize total costs on a necessary loan, always aim for a shorter loan term and provide a substantial down payment. A larger down payment reduces the initial loan principal that interest can accumulate on. Shorter terms (e.g., a 15-year mortgage instead of a 30-year) drastically reduce total lifetime interest fees, even though they result in a higher immediate monthly payment.

What are Stock Funds?

Ownership shares of individual companies with high market volatility but potential for large returns.

What are Bond Funds?

A lower-to-medium-risk loan made to a government or corporation that pays scheduled interest payments and returns the principal at maturity.

What are Mutual Funds?

A managed account that diversifies capital over a group of different stocks or bonds for a fee.

Explain level 1 of risk associated with different investment types.

(Lowest Risk): Insured savings accounts, money markets, and CDs. Principal is 100% secure, but returns are tiny and risk losing value to inflation. Treasury/municipal bonds carry very low default risk.

Explain level 2-3 of risk associated with different investment types.

(Medium Risk): Corporate bonds, real estate, and bond mutual funds.

Explain level 4-5 of risk associated with different investment types.

Stock mutual funds/index funds carry equity market volatility. Individual stocks carry maximum asset risk because a single company failure can wipe out your investment. Speculative assets like cryptocurrency have high asset volatility.

Justify what type of investment would be most beneficial given Short Timeframe (Under 2 years) / High Liquidity / Zero Risk.

If you need the cash soon (e.g., for tuition), an equity index fund is unjustified due to short-term market drops. An FDIC-insured high-yield savings account or a short-term CD is best because it guarantees your principal is completely safe and liquid.

Justify what type of investment would be most beneficial given Long Timeframe (10+ years) / Low Short-Term Liquidity / High Risk Tolerance.

If saving for retirement decades away, a cash savings account is unjustified due to inflation. A diversified stock Index Fund or Mutual Fund is best because you can ride out short-term recessions to capture the market's historical ~10% annual average compound growth.

What is a 401(K)?

An employer-sponsored retirement savings plan that allows employees to invest a portion of their paycheck before or after taxes, often featuring an employer matching contribution.

What is a Pension?

Government or private retirement funds where employees pay in each month, and at retirement receive a set percentage of their salary back every month until they die, managed communally and built with Cost-of-Living Adjustments (COLA).

What are Roth and Traditional IRAs?

Individual Retirement Accounts where a Traditional IRA features pre-tax contributions (taxes are paid upon withdrawal in retirement), while a Roth IRA features post-tax contributions (withdrawals in retirement are completely tax-free).

What is Social Security?

A federal program funded through a dedicated payroll tax (FICA) that functions as a social safety net, providing partial income replacement/benefits to retired workers, survivors, and individuals with disabilities.

What is a 403(b) plan?

A tax-advantaged retirement savings plan very similar to a 401(k), but exclusively available to employees of public education organizations (like public school teachers) and certain non-profit/tax-exempt organizations.