macroeconomics

problems with GDP

problems with GDP

-double counting

-underground economy

GDP per capita

-inflation

-

open market operation

buying and selling of securities between the FED and selected financial institutions

federal funds rate

the market-based interest rate which banks charge each other on overnight loans of their reserve balances held at the FED

who is responsible for fiscal policy?

government

difference between automatic stabilizer and discretionary stabilizers

automatic: involve unemployment, welfare, and taxes; happen right away-natural occurrences in circular flow

when to use contractionary fiscal policy?

during expansions to slow the economy

when to use expansionary fiscal policy?

during contractions to grow the economy

criticisms of fiscal policy

-long recognition and administration lags

more political nature of trying to get re-elected than making difficult decisions

-

who oversees monetary policy?

the Federal Reserve (FED)

tight monetary policy

causes money supply to decrease

loose monetary policy

causes money supply to increase

reserve ration under tight and loose monetary policy

loose: decreases

tight: increases

discount rate under tight and loose monetary policy

tight: rises

loose: lowers

open market transactions under tight and loose monetary policy

tight: sell

loose: buy

interest ratio under tight and loose monetary policy

tight: increases

loose: decreases

inflation under tight and loose monetary policy

tight: decreases

loose: increases

unemployment under tight and loose monetary policy

tight: increases

loose: decreases

economic growth under tight and loose monetary policy

tight: discorages

loose: encouraged

money

cash in circulation and amounts people and businesses have in bank accounts

credit

amounts that banks and other lenders can lend

fiscal policy-automatic stabilizers

-things that happen no matter what

-always functioning in the background

-created by government

fiscal policy-discretionary

-actions taken by government

-can become automatic

monetary policy

-actions taken by the FED

-objective is to influence the availability and cost if money and credit

stabilizers

-what can be done to help the economy

-can be fiscal or monetary

the way to get out of a contraction

spending

complete circular flow

shows how a domestic economy functions within the context of the larger global economy

simple circular flow

shows how people and businesses interact in the market

computing real GDP

current dollar (nominal) GDP/adjustment for inflation

deflation

-decline in price levels

-sign of weak economy

hyperinflation

money rapidly looses its value

-excessive and rapid rise in price levels

causes of inflation

-too much money in the economy

-demand exceeds supplies(demand pull)

-costs of inputs go up(cost pull)

inflation

-money becomes less valuable

-a rate of increase in the general price level of all goods and services

double counting

-occurs when the value of a contributor is counted more than once into GDP

-often happens with the re-sale of goods and services

underground economy

-unpaid housework

-barter

-black market

GDP per capita

-gives you a better perspective of the wealth of a nation

net foreign exports

the difference between exports and imports

(exports-imports)

trade deficit

when net foreign exports is negative

consumer spending

total spending on all durable goods, nondurable goods, and services

business investments

the physical investment in capital to make businesses better

government spending

guns and butter

ways to calculate GDP

income approach: total of all incomes earned in a year

expenditure approach: total spending for new goods and services produced for a year

growth rates for GDP

3-4%=average

5%=good

7-8%=great

Gross Domestic Product (GDP)

-total market value of a nation's final output of goods and services

-helps determine value of an economy

subsidy

money injected into the economy by government

bail out

when government intervenes to get the economy out of distress

pains in market fluctuations

during recession or contraction: high unemployment

during expansion: high inflation

leading economic indicators

-GDP

-inflation rates and CPI (consumer price index)

-unemployment rate

-interest rates

unemployment rate

the percentage of the labor force that does not have a paying job

-labor force includes all those 16+ who are working or actively looking for a job

interest rates

a rate which is charges to paid for the use of money

trough

-period before expansion or economic growth and recovery

-extreme low of the economy

-productivity is low and unemployment is high

depression

-a severe prolonged decline in the level of economic activity

-hard to define; no specific time period

recession

-a period of at least 6 months 92 business period) in which the economy does not grow

contraction

-prosperity begins to wear off

-economy begins to slow

peak

-period prior to contraction

-period of high prosperity

-economy is very productive

expansion

-economic recovery

-people are spending

business cycle

a series of rises and falls in the overall level of economic activity, measured by read GDP

deficit rule of thumb

-households and firm never want a deficit

-government doesn't want a deficit but will have one most likely (necessary evil)

austerity

cut back

reserve requirement

the amount of money banks must keep at reserve at the FED

discount rate

applies to the short-term loans made directly to commercial banks from the FED