D

Macroeconomics Unit II Notes

Essential Economic Concepts

  • Business Cycle: Model for evaluating U.S. market economy health.
    • Phases: Expansion, Peak, Contraction, Trough.
    • Economists can only predict transitions.
  • Economic Indicators: Benchmarks for economic health.
    • Examples: Employment, GDP, Stock Market, Capital Goods Purchases.

Phases of the Economy

  • Expansion Phase: Economy growing.
    • Goods & services sold, job growth, consumer confidence high, bullish stock market.
  • Contraction Phase: Economy declining.
    • Declining production, layoffs, increased consumer saving, bearish stock market.
    • Recession: Real GDP falls for two consecutive quarters.
  • Trough Phase: Economy bottoms out, beginning of growth cycle.
    • Prices, demand, supply adjust; weak businesses close.
  • Peak Phase: Economy tops out, beginning of contraction.
    • Max production and employment reached.

Economic Indicators

  • Leading Indicators: Fast changing, early warning signs (e.g., stock market).
  • Lagging Indicators: Slow changing, long-term effects (e.g., unemployment rate).

Gross Domestic Product (GDP)

  • Measures the dollar value of all final goods & services produced in one year.
  • GDP = Consumption + Investments + Government \, Spending + Net \, Exports
  • Real GDP: Measures production, removing price distortion (inflation).

Unemployment

  • Natural Unemployment Rate: Always a percentage of the population unemployed (normal < 5%).
  • Measurement: Civilian Labor Force (16+ actively seeking employment).
  • Formula: Unemployment \, Rate = \frac{Number \, of \, Unemployed}{Total \, Labor \, Force}
  • Types:
    • Seasonal: Jobs available only certain times of year
    • Structural: Skills don't match job market.
    • Frictional: Temporarily unemployed by choice.
    • Cyclical: Follows the business cycle.

Inflation

  • Persistent rise in prices, outpacing income.
  • Measured by the Consumer Price Index (CPI).
  • Demand-Pull Theory: Demand > supply causes prices to rise.
  • Cost-Push Theory: Production costs rise, causing prices to rise.
  • Hyper-inflation: Too much money in the economy.
  • Stagflation: Rising prices, contracting economy.

Government Economic Theories

  • Supply-side Economics: (Reaganomics) Lower taxes stimulate investment and job creation.
  • Keynesian Economics: Government creates demand via spending and programs.
  • Classical Theory: (Laissez-faire) Non-intervention; supply, demand, and price adjust naturally.

Monetary Policy & The Federal Reserve (The Fed)

  • The Federal Reserve provides price stabilization and banking oversight.
  • Tools:
    • Discount Rate: Interest rate Fed charges banks.
    • Open Market Operations: Buying/selling bonds.
    • Reserve Requirement: Amount banks must keep on hand.
  • Expansionary Monetary Policy: Goal to grow the economy by encouraging spending, buy bonds.
  • Contractionary Monetary Policy: Goal to shrink the economy by encouraging saving, sell bonds.

Supply and Demand Shifts

  • Shift right = increase.
  • Shift left = decrease.

Fiscal Policy

  • Congress and President use taxation & government spending to stimulate the economy.
  • Expansionary Fiscal Policy: Tax cuts or increased government spending.
  • Contractionary Fiscal Policy: Raising taxes or decreasing government spending.

Government Expenditures

  • Discretionary: Government has a choice on spending (e.g., military).
  • Mandatory: Government must spend (e.g., entitlements).

Types of Businesses

  • Sole Proprietorship: One owner, unlimited liability
  • Partnership: Two or more owners
  • Corporations: Multiple owners (stockholders), limited liability
  • Non-Profits: Profits support a cause, tax-exempt

Circular Flow of Economic Activity

  • Interaction between consumers, businesses, government, and trade.
  • Agents: Consumers, Businesses, Government, Foreign Countries.
  • Markets:
    • Product Market: Businesses sell goods/services to consumers.
    • Factor Market: Consumers supply resources to businesses.

International Trade

  • Globalization: increasing connectivity benefiting trade.
  • Exports Goods and services we sell to other countries
  • Imports Goods and services we buy from other countries
  • Trade Surplus: Exports > Imports.
  • Trade Deficit: Imports > Exports.
  • Absolute Advantage: Produce more with same resources.
  • Comparative Advantage: Produce at lower opportunity cost.
  • Protectionism: Limit competition.
    • Barriers: Tariffs, Embargoes, Quotas
  • Free Trade: Remove barriers, trade freely.

Labor Unions

  • Group fighting for workers' interests.
  • Collective bargaining, mediation, arbitration, boycotts, picketing and strike
  • Types:
    • Craft/Trade Unions: Same skills.
    • Industrial Unions: Different workers, same industry.