Unit 3: Economic

How many phases does the business cycle have?

How many phases does the business cycle have?

4

What do the phases of the business cycle reflect?

The repeated ups/expansions and downs/contractions of the economy

Government regulation helps prevent

periods of extreme growth and decline

Gross Domestic Product (GDP

Total value of all final goods and services its people produce in one year

Factors affects GDP

Population expansion or contraction, Entrepreneurism, Trade, War, and Natural Resources

Population expansion or contraction

With more people, more goods and services can be produced

Entrepreneurism

Creation of new goods/services = huge GDP expansion

Trade

Increased trade POSSIBLY increases GDP, but depends on total value of trade and relative value to other economic activity

War

Nations with good supply of military arms and related supplies can receive positive effect on GDP

Natural Resources

Discovery of new natural resource or depletion of important natural resource could positively or negatively impact GDP

A significant indicator of the health of the economy

Unemployment, which is a rate measuring the percentage of workers who do not have a job and are looking for one

Inflation

the general rise of the prices of goods and services over time

Deflation

the general decline of the prices of goods and services over time

Business Cycle

Expansion, Peak, Contraction, and Depression/Trough Phase

Expansion Phase (1)

GDP Increases, Inflation increasing, and unemployment rate decreased

Peak Phase (2)

Production at highest level, Excellent time for business, and represents start of contraction phase

Contraction Phase (3)

Deflation and unemployment rate increasing

Depression/Trough Phase

Trough (Contraction to expansion), Full cycle of phases last 3-5 years, worst period of decline

Stagflation

High inflation combined with high unemployment rates

Aggregate

total combination of data from various economic sectors

Adam Smith

Studied idea of free market and individual interest ____ Studied "The Wealth of Nations" (Economy regulated itself thru interaction of supply and demand) ____ Supported laissez faire economic policy, free trade between nations and individuals answering the basic economic questions

Karl Marx

Studied Das Kapital (Agrarian to industrial economy) _____ Supported government answering basic economy questions and high degree of economic regulation

John Maynard Keynes

Studied General Theory of Employment, Interest, and Money (Supported government borrowing money, spending taxes on programs to help minimize unemployment and keep businesses in operation ANDDD government policies that places restrictions on bank and others (to prevent major swings in economy)) ____ Believed capital system would be most efficient in answering

3 Basic economic questions

1. What to produce?

2. How to produce?

3. For whom to produce?

Four Major types of economic systems

Traditional, Command, Free Market, and Mixed

Most countries have what type of economy?

Mixed

Traditional

Economy revolves around individuals and family unit activity (e. agriculture, trade) ____ Leaders: Local, most significant in vill./town life ___ Trad Eco. Examples: Remote areas w. no industrial activity (Amish lands) or strong government. connection outside local area ____ Also known as subsistence economies because they focus on producing what's necessary for community ___ Most trade done locally

Command

Economy revolves around government decisions ____ Government chooses goods and services to produce, production quantities and prices to charge ____ Leaders: Determine training, education, employment opportunities, and wages ____ Ex: [True Command] government would control every aspect of people's economic lives ------ Goal: To prevent uncontrolled private growth ------ All 4 factors of productions controlled by government

Free Market

Economy revolves around individuals and business firms who determine the goods and services to provide _____ Individuals and business firms seeks to earn profit _____ Ex: [True free market economy] Most global trade is done by individuals and companies ------ Few regulations by government and free trade encourage _____ Ex 2: [True free market economy] Forces of supply and demand would drive production and determine prices without government involvement

Mixed

Mixed = economy somewhere between command and free market _____ Leaders: Seeks to combine individual initiative and progress with protection of government intervention _____ [Mixed economy] generally allows for free trade ------ Government still has some control over what can be exported and imported ------ Exports and imports subjected to governmental barriers

Economic perspective can

best meet national economic goals and affect how political leaders make choices

Why is identifying a “best” type of economy is subjective and can be controversial?

Depend on personal criteria of house person judges the systems _______ Perspective can change

Federal Debt

total amount of money the government borrows to fund its programs

2 tools of fiscal policy

government uses the tools of taxing and spending

Taxes

Main source of government revenue

Expansionary Fiscal Policy

Increased government spending or decreased taxes to reduce unemployment and stimulate economic growth

Contractionary fiscal policy

Reduced government spending or increased taxes to lower inflation

Economic goals of the fiscal policy

full employment, price stability, and economic growth

Surplus

When a government collects more revenue than it spends

Deficit

When a government spends more than it collects

Debt

Accumulation of budget deficits over time

How does the government borrow money?

by selling bonds and other investments to individual people, companies, and those in other countries

Deficit spending can add to the _________, but it can also help the economy grow during a period of contraction or a ________

National debt; national crisis

Changes to the fiscal policy may affect the government's

Yearly budget

The Federal Reserve

The independent central bank of the U.S.

Sections making up the Federal Reserve System

Board of Governors, Federal Open Market Committee, Federal Reserve Banks, Member Banks, and Other Depository Institutions (Technically not part of Fed. Reserve system)

Purpose of Board of Governors

• Analyzes economic data (interest and unemployment rates)

• Supervises Fed. Reserve Banks

• Creates + oversees financial regulations

• Participates in Fed. open market committee

• Communicates with leaders in other parts of government

Purpose of Federal Open Market Committee

Gathers for 8 meeting per year in Washington Dc, using data (e.g unemployment rate) to determine state of economy and decide the measures that should be taken to adjust money supply

Purpose of Federal Reserve Banks

Helps commercial banks manage their funds, handles check collections, and EFTs and provides service for U.S treasury accs. (issue + redeem government bonds and securities)

Purpose of Member Banks

• Holds stock in regional Federal Reserve Bank and can receive dividend or portion of Fed's earning

• Receive services from regional fed. reserve bank (check processing, electronic funds transfer, distribution of currency and coin)

Purpose of Other Depository Institutions (Technically not part of Fed. Reserve system)

Receive services from regional Fed. Reserve banks (check process, electronic funds transfer, etc.)

How the Board of Governors affects people

• Financial security and reassurance

• Regulates Fed reserve system to ensure stable money supply, impacting rate of inflation

• Adjusts certain regulation to ensure stability within banking system, protecting banking institutions and consumers

How the Federal Open Market Committee affects people

• Lower interest rates set by them = lower interest rate you'd pay on loan

• Determines rate at which banks can borrow money

How the Federal Reserve Banks affects people

• Allows you to receive services (writing check, receiving cash from ATM)

• Provides [bank] with legal currency and coins

How the Other Depository Institutions affects people

Allows you to receive services (Check cashing, depositing)

How the Member Banks affects people

Pays dividends to stockholders

Federal Reserve works to promote

full employment, price stability, and economic growth

Check

set of written instructions telling your bank to take a certain amount of your money out of your account and give it to the person or business you identify

______ pay services print and mail checks on a scheduled date, while ______ is a direct debit from your bank account.

Online bill/ electronic check payments/eChecks

The Federal Reserve must respond to

changing economic conditions

Monetary Policy

Federal Reserve actions that monitor and control the U.S. money supply to meet economic goals

Money Supply

total amount of money available in the national economy.

Contractionary

Contracting/Decreasing money supply, Slowing expected to control inflation and slow economic growth

Expansionary Monetary Policy

Faster Growth of money supply, Increased money supply, increase expected to fight recession

Goal of monetary policy

to smooth out the business cycle and to promote full employment, price stability, and economic growth

3 Main tools of monetary policy that affect money supply

• Discount Rate ----- Interest rate of Fed Reserve charges banks to borrow currency __

• Reserve Requirement -----The percentage of a bank's deposits that must be kept as currency and coin in the bank ___

• Open market operations ----- Fed Reserve's frequent buying and selling of government securities (e.g bonds)

Decreases in the money supply are associated

slower economic growth, which can help control inflation

Why do banks buy money from the Fed?

To cover their operations in the short term

U.S. CONGRESS FISCAL POLICY TOOLS

Taxing and Spending

U.S. CONGRESS FISCAL POLICY CONTRACTIONARY ACTIONS

Increase taxes and Decrease spending

U.S. CONGRESS FISCAL POLICY EXPANSIONARY ACTIONS

Decreases taxes and Increases spending

U.S. CONGRESS FISCAL POLICY TIME

Takes longer to enact and have effect BUTTT impact tends to be for longer period

FEDERAL RESERVE MONETARY POLICY TOOLS

Discount rate, Reserve Requirement, and Open market operations

FEDERAL RESERVE MONETARY CONTRACTIONARY ACTIONS

Increase the discount rate ------ Instead of borrowing from the federal funds market, or for more serious needs, call in loans to replace those reserves. ____ Increase the reserve requirement _____ Sell government securities

FEDERAL RESERVE MONETARY EXPANSIONARY ACTIONS

Decrease discount rate

• Lessens interest banks would have to pay for when borrowing cash ____ Decrease reserve requirement

• Lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. _____ Buy government securities

• Buys securities when it wants to increase the flow of money and credit

• It encourages banks to lend more. When the Fed buys bonds from banks, their cash reserves at the Fed go up.

FEDERAL RESERVE MONETARY TIME

Faster to enact/respond to situation BUTTT Impact tends to be shorter terms and is more difficult to evaluate

Broad ways that economists measure a country’s economic conditions

Freedom, Equity, Growth, Security, and Efficiency

Freedom Description

Extent of personal choice ___ Ability to enter, compete, and exchange in markets __ Protection of personal property

Equity Description

Extent to which citizens have opportunities to contribute to + share in the country's overall wealth in a fair and impartial manner

Security Description

Extent to which citizens are able to provide for their own material well-being

Efficiency Description

Maximizing society's use of resources in production

Growth Description

Increasing overall output and standard of living over time

Areas in which the Human Development Index measures progress

• Average Life Expectancy

• GNI Per Capita (PPP)

• Expected years of schooling

• Average Years of Schooling

• Personal Purchasing power

• Gender inequality

• Poverty

Purpose of the Human Development Index

to help countries track their own progress and set goals. It also enables for comparison of levels of development between countries

How economists avoid bias

must be methodical in the way they take measurements, collect statistics, and report the data.

Countries should ______ in products that they can produce at a lower cost than other countries.

trade

Absolute advantage

The ability to produce more of a good with the same or fewer resources AND determines whether a trade offer is worthwhile

Comparative advantage

The ability to produce a good with a lower opportunity cost AND matters for international trade

Nations should specialize in product with

lesser opportunity cost

Arguments to ban trade

Consumer Confidence, Domestic jobs, Domestic Businesses, National Security, and Prices

Consumer Confidence Results

Avoid drops in market demand because of quality, safety, or ethical concerns arising from foreign products.

Domestic jobs Results

Avoid sweatshops, child labor, forced labor, and other undesirable working conditions that attract companies to employ foreign workers

Domestic Businesses Results

Avoid competition of low pay for foreign workers or recognition of a foreign brand

National Security Results

Avoid dependence on imports for items critical to defense

Prices Results

Avoid oversupply of cheap foreign products forcing domestic producers to lower prices

Consumers contribute to the market for imported goods by _____ and______ goods produced in other countries

purchasing; using

Barriers to trade

Quota, Tariff, Regulation, licenses, Local Content Requirements, and Embargo

Quota Description

• the limit that countries will place on the amount of an imported product.

• Less Product = Quantity supplied decreased, Price increase

• Helps domestic companies compete by price and have greater portion of availability for consumers

Tariff Description

• Tariff increases price of import goods = Quantity demanded decreased, increase tax revenue for government

• Helps level prices by increasing prices of foreign goods

• Helps higher-priced domestic goods compete by price by decreasing difference in prices between foreign and domestic goods

Regulation Description

• Safety and quality standard that serves as a standard for environmental or ethical impact

• Can result in ban of hazardous specific ingredients

• Prevent imports of unsafe/unsound goods

• Helps protect consumers and environment from harm