Unit 3 Study Guide-HNRS.ECON

1. What does GDP show? What is GDP used for? How does it relate to economic growth?

   • GDP measures the total dollar value of all final goods and services produced within a country’s borders in a given year. It is used to gauge the overall economic performance of a country. A growing GDP indicates economic expansion, while a shrinking GDP suggests economic contraction.

2. Explain the GDP formula.

   • The GDP formula is: GDP=C+I+G+(X−M)GDP = C + I + G + (X - M)GDP=C+I+G+(X−M) Where:

     • C = Consumer spending

     • I = Business investments

     • G = Government spending

     • X - M = Net exports (exports minus imports)

3. What's the difference between real and nominal/current GDP?

   • Nominal (Current) GDP is measured in current prices without adjusting for inflation.

   • Real GDP adjusts for inflation, providing a more accurate picture of economic growth over time.

Unemployment

4. Describe the four types of unemployment and the five causes of structural unemployment. Is unemployment always bad? Why?

   • Four types of unemployment:

     • Frictional – When workers are between jobs by choice.

     • Structural – When skills no longer match job market demands.

     • Cyclical – When job loss occurs due to downturns in the business cycle.

     • Seasonal – When jobs disappear during certain times of the year.

   • Five causes of structural unemployment:

     • Changes in technology

     • Changes in consumer demand

     • Globalization (jobs moving overseas)

     • Government policies (e.g., minimum wage laws)

     • Lack of education or training

   • Is unemployment always bad?

     • Not necessarily. Some level of unemployment (like frictional unemployment) is natural and even beneficial as workers find better jobs. However, high unemployment can signal economic problems.

Inflation

5. How do you measure inflation? What is the CPI?

   • Inflation is measured using the Consumer Price Index (CPI), which tracks the price changes of a basket of goods typically purchased by urban families.

6. Who is hurt/helped by unanticipated inflation?

   • Hurt:

     • People on fixed incomes

     • Savers (money loses value)

     • Lenders (loans repaid with less valuable money)

   • Helped:

     • Borrowers (debt is easier to pay off)

     • Businesses that can raise prices faster than costs increase

7. Describe the causes of inflation.

   • Demand-pull inflation – Too much demand for goods and services causes prices to rise.

   • Cost-push inflation – Rising production costs (e.g., wages, raw materials) push prices up.

   • Hyperinflation – Extremely rapid inflation that spirals out of control.

Macroeconomic Goals & Business Cycle

8. What are the goals of Macroeconomics? How do the questions before this one relate to those goals?

   • Three main goals:

     • Economic growth (measured by GDP)

     • Full employment (low unemployment)

     • Price stability (controlling inflation)

   • The previous questions relate to these goals because GDP, unemployment, and inflation are key indicators of economic health.

9. What is the business cycle? What are its stages?

   • The business cycle describes the natural fluctuations of the economy. Its stages are:

     • Expansion – GDP is rising, economy is growing

     • Peak – GDP stops increasing

     • Contraction (Recession) – GDP declines

     • Trough – GDP stops declining and starts rising again

10. What is a recession? What is a depression? How are they related to the business cycle and GDP?

    • Recession – A period of at least two consecutive quarters (6 months) of GDP decline.

    • Depression – A severe, long-term decline in GDP, worse than a recession.

    • Relation to business cycle: Both are part of the contraction phase, where GDP is declining.

Federal Reserve & Monetary Policy

11. How is the Federal Reserve organized? Describe all of the different levels.

    • The Federal Reserve System (Fed) is the U.S. central banking system, structured as follows:

      • Board of Governors – Oversees entire system, sets policy

      • 12 Regional Federal Reserve Banks – Implement policy at a regional level

      • Member Banks – Private banks that are part of the Federal Reserve System

      • Federal Open Market Committee (FOMC) – Makes key decisions about monetary policy

12. What does the Federal Reserve do? What is their "Dual Mandate"?

    • The Fed’s main roles include regulating banks, managing money supply, and controlling inflation and unemployment.

    • Dual Mandate:

      • Keep inflation low and stable

      • Maximize employment

13. Why is the FOMC necessary?

    • The Federal Open Market Committee (FOMC) is responsible for controlling money supply through open market operations, which help stabilize the economy.

14. Explain how monetary policy is used by the Fed to influence the movement of money in the economy.

    • The Fed uses monetary policy to control the supply of money and influence interest rates.

      • Expansionary Policy (to boost economy):

        • Lowers interest rates

        • Buys government bonds to increase money supply

      • Contractionary Policy (to slow down economy and fight inflation):

        • Raises interest rates

        • Sells government bonds to reduce money supply

15. Explain how rates and bonds are used to speed up or slow down the movement of money in the economy.

    • Lower interest rates → Cheaper borrowing → More spending → Economic growth

    • Higher interest rates → Expensive borrowing → Less spending → Slows economy

    • Buying bonds → Injects money into economy → Growth

    • Selling bonds → Takes money out of economy → Slows inflation

16. Explain the difference between the five rates influenced by the Fed.

    • Discount Rate – The interest rate banks pay when borrowing from the Fed.

    • Federal Funds Rate – The rate banks charge each other for overnight loans.

    • Prime Rate – The interest rate banks charge their best customers.

    • Mortgage Rates – The interest rate on home loans, influenced by Fed policy.

    • Savings Account Rates – The interest banks pay on deposits, which rise and fall with the Fed’s actions.

17. What are some of the problems the Federal Reserve has when trying to influence the economy?

    • Time Lag – Monetary policy takes time to affect the economy.

    • Global Factors – International events (e.g., oil prices, foreign markets) can limit the Fed’s effectiveness.

    • Unpredictable Behavior – People and businesses may not react as expected to Fed policies.

    • Political Pressure – The Fed is independent, but government policies can affect its decisions.