Unit 4 Exam

Unit 4 - The National Economy

Section 4.1 - The Role of Government in the U.S. Economy

• 4.1.1 The Role of Government in the U.S. Economy

  • 3 macroeconomic goals of an economy

  • 2 economic policies used by the Federal government

• 4.1.2 An Introduction to Fiscal and Monetary Policy

  • 2 tools of Fiscal Policy

  • 2 tools of Monetary Policy

  • Progressive Tax vs. Regressive Tax

  • Inflation definition

• 4.1.3 Utilizing Fiscal Policy

  • Creator & implementer of Fiscal Policy

  • Expansionary Fiscal Policy effects on spending & taxes

  • Primary goal of expansionary fiscal policy

  • Contractionary Fiscal Policy effects on spending & taxes

  • Primary goal of contractionary fiscal policy

  • 4 types of Policy Lags

• 4.1.4 Utilizing Monetary Policy

  • Creator & implementer of Monetary Policy

  • Expansionary Monetary Policy effects on money supply & interest rates

  • Primary goal of expansionary monetary policy

  • Contractionary Monetary Policy effects on money supply & interest rates

  • Primary goal of contractionary monetary policy

  • Republican vs. Democratic administrations' preferences

Section 4.2 - The Federal Reserve System

• 4.2.1 The Federal Reserve System

  • Definition of the Federal Reserve System

  • Fed's supervision of the banking system

  • Daily activities of Federal Reserve Banks

  • Differences between a Federal Reserve Bank and a regular bank

  • Fed's most important function and other 3 functions

  • Fed Funds Rate and Reserve Rate explanation

• 4.2.2 The Federal Reserve: The Fed, Monetary Policy & International Trade

  • Impact of the Dollar's value on the economy

  • Effects of Dollar value changes

  • Dollar's status as the Global Currency

  • Exchange Rate definition

Section 4.3 - Gross Domestic Product & The Business Cycle

• 4.3.1 Gross Domestic Product & The Business Cycle

  • GDP definition and components

  • Calculation methods for GDP

  • Non-Durable Goods vs. Durable Goods

  • Significance of GDP per capita

  • Real GDP vs. Nominal GDP

  • Business Cycle phases

Questions:

Unit 4 - The National Economy

Section 4.1 - The Role of Government in the U.S. Economy

(4.1.1) The Role of Government in the U.S. Economy

What are the 3 macroeconomic goals of an economy?

What are the 2 economic policies the Federal government uses to achieve these macroeconomic goals?

(4.1.2) An Introduction to Fiscal and Monetary Policy

What are the 2 “tools” of Fiscal Policy?

What are the 2 “tools” of Monetary Policy?

What is a Progressive Tax

What is a Regressive Tax?

What is Inflation?

(4.1.3) Utilizing Fiscal Policy

Who creates & implements Fiscal Policy?

What happens to spending & taxes when utilizing Expansionary Fiscal Policy?

What is the primary goal of expansionary fiscal policy?

What happens to spending & taxes when utilizing Contractionary Fiscal Policy?

What is the primary goal of contractionary fiscal policy?

What are the 4 types of Policy Lags?

(4.1.4) Utilizing Monetary Policy

Who creates & implements Monetary Policy?

What happens to the money supply & interest rates when utilizing Expansionary Monetary Policy?

What is the primary goal of expansionary monetary policy?

What happens to the money supply & interest rates when utilizing Contractionary Monetary Policy?

What is the primary goal of contractionary monetary policy?

Which policies do Republican administrations prefer?

Which policies do Democratic administrations prefer?

Section 4.2 - The Federal Reserve System

(4.2.1) The Federal Reserve System

What is the Federal Reserve System?

How does the Fed supervise the banking system?

What do Federal Reserve Banks do on a day-to-day basis?

How is a Federal Reserve Bank different from your own bank?

What is the Feds most important function?

What are the other 3 functions of the Fed?

What is the Fed Funds Rate?

How does the Fed Funds Rate work?

What is the Reserve Rate?

How does the Reserve Rate work?

(4.2.2) The Federal Reserve: The Fed, Monetary Policy & International Trade

How does the Value of the Dollar affect the economy?

What happens when the value of the dollar increases/decreases?

How has the value of the dollar changed over time?

Why is the dollar the Global Currency?

What is the Exchange Rate?

Section 4.3 - Gross Domestic Product & The Business Cycle

(4.3.1) GROSS DOMESTIC PRODUCT & THE BUSINESS CYCLE

What does GDP stand for?

What gets counted in U.S. GDP?

What are the 2 methods used to calculate GDP?

What is a Non-Durable Goods?

What is a Durable Goods?

What does GDP per capita tell us?

What is the difference between Real GDP & Nominal GDP?

The Business Cycle

What are the 4 phases of the business cycle?

Section 4.4 - Unemployment

(4.4.1) Unemployment

How is Unemployment defined?

What are the 3 types of unemployment?

Answers:

(4.1.1) The three macroeconomic goals of an economy are:

1. Economic growth: This refers to an increase in the overall production of goods and services in an economy over time. It is measured by changes in the gross domestic product (GDP).

2. Full employment: This goal aims to achieve a low level of unemployment where most individuals who are willing and able to work can find employment.

3. Price stability: This goal seeks to maintain a stable and predictable rate of inflation, which means keeping the general level of prices relatively constant over time.

The two economic policies the Federal government uses to achieve these macroeconomic goals are fiscal policy and monetary policy.

(4.1.2) The two "tools" of fiscal policy are:

1. Government spending: The government can influence the economy by increasing or decreasing its spending on goods, services, and infrastructure projects. Increased government spending can stimulate economic growth and job creation.

2. Taxation: The government can adjust tax rates to influence individuals' and businesses' disposable income. Changes in taxation can affect consumer spending, investment, and overall economic activity.

The two "tools" of monetary policy are:

1. Open market operations: This involves the buying and selling of government securities (bonds) by the central bank to control the money supply in the economy. When the central bank buys bonds, it injects money into the economy, increasing the money supply. Conversely, when it sells bonds, it reduces the money supply.

2. Interest rate manipulation: The central bank can adjust interest rates to influence borrowing costs and credit availability. Lowering interest rates encourages borrowing and spending, stimulating economic activity. Raising interest rates can reduce borrowing and dampen inflationary pressures.

A progressive tax is a tax system in which the tax rate increases as the taxable income or wealth of an individual or corporation increases. It is based on the principle of ability to pay, where higher-income individuals or entities pay a higher proportion of their income or wealth in taxes.

A regressive tax is a tax system in which the tax rate decreases as the taxable income or wealth of an individual or corporation increases. In regressive taxation, the burden of the tax falls disproportionately on lower-income individuals or entities.

Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. It erodes the purchasing power of money and reduces the value of each unit of currency. Inflation is typically measured by calculating the percentage change in a price index, such as the Consumer Price Index (CPI).

(4.1.3) Fiscal policy is created and implemented by the government, specifically the legislative branch (Congress) in the United States. The executive branch (the President and the administration) plays a significant role in proposing fiscal policy measures and working with Congress to enact them.

When utilizing expansionary fiscal policy, government spending increases, and/or taxes decrease. The primary goal of expansionary fiscal policy is to stimulate economic growth and increase aggregate demand.

When utilizing contractionary fiscal policy, government spending decreases, and/or taxes increase. The primary goal of contractionary fiscal policy is to decrease aggregate demand to control inflation or reduce budget deficits.

The four types of policy lags are recognition lag (the time it takes to identify a problem), decision lag (the time it takes for policymakers to decide on a course of action), implementation lag (the time it takes to implement the policy), and effectiveness lag (the time it takes for the policy to have its desired effect on the economy).

(4.1.4) Monetary policy is created and implemented by the central bank of a country. In the United States, monetary policy is determined by the Federal Reserve System, often referred to as the Fed.

When utilizing expansionary monetary policy, the central bank increases the money supply and lowers interest rates to stimulate borrowing and spending, which aims to boost economic growth and increase employment.

When utilizing contractionary monetary policy, the central bank reduces the money supply and raises interest rates to restrict borrowing and spending, which aims to control inflation and cool down an overheating economy.

Republican administrations generally prefer policies that prioritize lower taxes, reduced government spending, and a more limited role for government in the economy.

Democratic administrations generally prefer policies that prioritize social welfare programs, progressive taxation, and increased government spending on areas such as education, healthcare, and infrastructure.

(4.2.1) The Federal Reserve System, often referred to as the Fed, is the central banking system of the United States. It was established in 1913 and is responsible for conducting monetary policy, supervising and regulating banks, and maintaining the stability of the financial system.

The Fed supervises the banking system by setting regulations and conducting examinations to ensure banks operate safely and soundly. It also provides banking services to commercial banks and acts as a lender of last resort during times of financial distress.

On a day-to-day basis, Federal Reserve Banks facilitate the clearing and settlement of payments between banks, manage the nation's currency and coin supply, and provide various financial services to the U.S. government, banksand financial institutions.

A Federal Reserve Bank is different from an individual's own bank in that it is not a commercial bank that provides services to individuals or businesses directly. Instead, Federal Reserve Banks serve as the operating arms of the Federal Reserve System, implementing monetary policy and performing functions related to the stability and functioning of the overall banking system.

The Fed's most important function is to conduct monetary policy, which involves managing the money supply and interest rates to achieve the Federal Reserve's dual mandate of price stability and maximum employment.

In addition to conducting monetary policy, the Fed has three other functions:

1. Supervising and regulating banks: The Fed is responsible for ensuring the safety and soundness of the banking system by setting regulations, conducting examinations, and supervising banks to promote financial stability.

2. Maintaining financial system stability: The Fed monitors and addresses risks to the overall stability of the financial system, including systemic risks and disruptions that may arise in financial markets.

3. Providing financial services: Federal Reserve Banks provide various financial services to depository institutions, such as processing payments, distributing currency and coin, and serving as a lender of last resort in times of financial stress.

The Fed Funds Rate is the interest rate at which banks and other depository institutions lend reserves to each other overnight, usually to meet reserve requirements. It is an important tool used by the Federal Reserve to implement monetary policy and influence short-term interest rates in the economy.

The Fed Funds Rate is determined through open market operations, where the Federal Reserve buys or sells government securities (bonds) in the open market. By buying bonds, the Fed injects reserves into the banking system, which lowers the Fed Funds Rate. Conversely, selling bonds removes reserves, raising the Fed Funds Rate.

The reserve rate, also known as the reserve requirement or reserve ratio, is the percentage of deposits that banks are required to hold as reserves. It is set by the Federal Reserve as a tool to regulate the amount of money banks can lend out. By adjusting the reserve rate, the Fed can influence the amount of money banks have available for lending and thereby impact the money supply in the economy.

(4.2.2) The value of the dollar affects the economy in several ways:

1. Trade and exports: A stronger dollar makes imports cheaper but can make exports more expensive. This can lead to a trade deficit as imports increase and exports decrease. A weaker dollar can make exports more competitive and boost economic growth.

2. Inflation: A stronger dollar can help keep inflation low by reducing the cost of imported goods and materials. Conversely, a weaker dollar can increase import prices and potentially contribute to inflationary pressures.

3. Capital flows: The value of the dollar affects international capital flows. A stronger dollar can attract foreign investment, as it offers higher returns and purchasing power. Conversely, a weaker dollar can discourage foreign investment and lead to capital outflows.

The value of the dollar can increase or decrease based on various factors such as interest rates, economic indicators, geopolitical events, and market sentiment.

Over time, the value of the dollar has fluctuated against other currencies. Factors such as changes in interest rates, economic growth, trade imbalances, and geopolitical developments can influence the value of the dollar in relation to other currencies.

The U.S. dollar is considered the global currency primarily due to the stability of the U.S. economy, the size of the U.S. market, and the widespread acceptance of the dollar in international trade and financial transactions. The U.S. dollar is also the primary reserve currency held by central banks around the world.

The exchange rate is the rate at which one currency can be exchanged for another. It represents the value of one currency relative to another. Exchange rates can be fixed, where they are set by central banks or governments, or they can float freely, determined by market forces of supply and demand. Changes in exchange rates can impact international trade, investment flows, and the competitiveness of domestic industries.

(4.3.1) Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced within a country's borders during a specific period, typically a year. It is used to gauge the size and growth of an economy.

In the United States, GDP includes the following components:

1. Personal consumption expenditures (C): This represents the total spending by individuals and households on goods and services, such as food, housing, healthcare, and transportation.

2. Gross private domestic investment (I): This includes business investment in machinery, equipment, and structures, as well as residential investment (housing construction).

3. Government consumption and gross investment (G): This includes government spending on goods and services, such as defense, education, healthcare, and infrastructure. It also includes government investment in structures and equipment.

4. Net exports (X - M): This is the difference between exports (X), which represent goods and services produced domestically and sold abroad, and imports (M), which represent goods and services produced abroad and purchased domestically.

There are two primary methods used to calculate GDP:

1. Expenditure approach: This approach adds up the total spending on final goods and services in the economy, as mentioned above (C + I + G + (X - M)).

2. Income approach: This approach adds up all the incomes earned by individuals and businesses in the economy, including wages, profits, rents, and interest.

Non-durable goods are goods that have a short lifespan and are typically consumed quickly. Examples include food, beverages, clothing, and fuel.

Durable goods are goods that have a longer lifespan and are expected to last for a relatively long time. Examples include cars, furniture, appliances, and electronics.

GDP per capita is a measure of the average economic output per person in a country. It is calculated by dividing the total GDP of a country by its population. GDP per capita provides an indication of the standard of living and economic well-being of the average individual in a country.

The difference between real GDP and nominal GDP lies in how they are adjusted for changes in prices over time:

1. Nominal GDP: This is the GDP figure that is not adjusted for inflation. It represents the current dollar value of all goods and services produced in an economy.

2. Real GDP: This is the GDP figure that is adjusted for inflation. It takes into account changes in price levels over time, allowing for a more accurate comparison of economic output across different periods. Real GDP reflects changes in the quantity of goods and services produced rather than changes in prices.

(4.3.2) The business cycle refers to the fluctuations in economic activity that occur over time. It is characterized by alternating periods of expansion and contraction in the economy. The four phases of the business cycle are:

1. Expansion: This phase represents a period of increasing economic activity. It is characterized by rising GDP, increased production, higher employment levels, and growing consumer and business spending. During this phase, economic indicators generally show positive trends.

2. Peak: The peak represents the highest point of economic activity in the business cycle. It marks the end of the expansion phase and the beginning of a contraction. At the peak, the economy reaches its maximum output and employment levels. Prices may also be at their highest during this phase.

3. Contraction (or recession): This phase represents a period of declining economic activity. It is characterized by falling GDP, reduced production, higher unemployment rates, and decreased consumer and business spending. During this phase, economic indicators generally show negative trends. If the contraction is severe and prolonged, it is referred to as a recession.

4. Trough: The trough represents the lowest point of economic activity in the business cycle. It marks the end of the contraction phase and the beginning of an expansion. At the trough, the economy reaches its lowest output and employment levels. Prices may also be at their lowest during this phase.

(4.4.1) Unemployment is defined as the state of being without a paid job while actively seeking employment. In other words, it refers to individuals who are willing and able to work but are unable to find suitable employment.

The three types of unemployment are:

1. Frictional unemployment: This type of unemployment occurs when individuals are temporarily between jobs or are in the process of transitioning from one job to another. It is often considered a natural part of a healthy labor market as workers search for jobs that best match their skills and preferences.

2. Structural unemployment: Structural unemployment arises from shifts in the structure of the economy, such as changes in technology, industry restructuring, or changes in consumer demand. It occurs when there is a mismatch between the skills and qualifications of available workers and the requirements of available jobs.

3. Cyclical unemployment: Cyclical unemployment is associated with the business cycle and economic recessions. It occurs when there is a decrease in overall economic activity, leading to a reduced demand for labor. During economic downturns, businesses may lay off workers, resulting in increased unemployment rates.

There is also a concept called(4.4.1) continued:

There is also a concept called seasonal unemployment, which is a subset of frictional unemployment. Seasonal unemployment occurs when individuals are unemployed due to seasonal variations in demand for certain industries or occupations. For example, agricultural workers may be unemployed during the off-season or retail workers may be laid off after the holiday season.

Additionally, there may be instances of voluntary unemployment, where individuals choose not to work despite being able to find employment. This could be due to factors such as personal preferences, discouraged workers who have given up actively seeking employment, or individuals pursuing education or training instead of immediate employment.

It's worth noting that the unemployment rate, which is commonly reported in economic indicators, is calculated as the number of unemployed individuals divided by the total labor force (which includes both employed and unemployed individuals actively seeking work).

(4.4.1) Unemployment is defined as the state of being without a paid job while actively seeking employment. It refers to individuals who are willing and able to work but are unable to find suitable employment.

The three main types of unemployment are:

1. Frictional Unemployment: This type of unemployment occurs when individuals are temporarily between jobs or are in the process of transitioning from one job to another. It is often considered a natural part of a healthy labor market as workers search for jobs that best match their skills and preferences. Frictional unemployment can be influenced by factors such as job search time, geographic mobility, and information gaps between job seekers and employers.

2. Structural Unemployment: Structural unemployment arises from shifts in the structure of the economy, such as changes in technology, industry restructuring, or changes in consumer demand. It occurs when there is a mismatch between the skills and qualifications of available workers and the requirements of available jobs. Structural unemployment can be influenced by factors such as technological advancements, globalization, and changes in industry composition.

3. Cyclical Unemployment: Cyclical unemployment is associated with the business cycle and economic recessions. It occurs when there is a decrease in overall economic activity, leading to a reduced demand for labor. During economic downturns, businesses may lay off workers, resulting in increased unemployment rates. Cyclical unemployment can be influenced by factors such as changes in aggregate demand, economic policies, and business cycles.