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.