Unit 4: Unit 4: MacroeconomicsMacroeconomics

study of how ________________of an economy ___________________.

all the partswork together

Gross Domestic Product (GDP) - ________________of all __________________________ produced in a country in __________

Recession - __________in real GDP lasting for at least _____________

Expansion - period of _______________from a _________________Consumer Price Index (CPI) - used to _______________________

for market basket of goods

Inflation - ___________in the __________________level of ______________

Deflation – _________________in the ______________________of goods and services

Stagflation - ____________________of stagnant economic _______________ and _____________________

Unemployment rate - ______________of _________________individuals divided by total # of ________________in ____________________

total valuegoods and services 1 year

decline 6 monthsrecovery recession

measure price changes

rise general prices

decrease average price

combination growthinflation

ratio unemployedpeople the workforce

I. Measuring Economic Activity A. Gross Domestic Product – ______

1. __________ of all ________ goods and services.

Example: There is no need to count the output of the steel industry, which is an "intermediate" input, because the value of the steel will be counted in cars, refrigerators, buildings and all the other final uses of steel.

2. More goods & services = ___________economy (usually)

3. Per capita GDP: ______________________

GDP

Total value FINAL

healthier

GDP/Population

http://www.slatev.com/video/what-exactly-gdp/

Inflation is an increase in the average price level in the economy. A positive rate of inflation does not mean that every single price increases, nor that all prices increase by the same amount, nor that the price of some goods didn't fall. It represents an average price increase for the goods and services in the economy.

B. Consumer Price Index – _____

2010: Feast for 10 = $43.47

2011: Feast for 10 = $49.20

CPI

1. CPI measures changes in prices.

2. It uses a “market basket” of goods and services to compare prices from one time period to another.

3. Changes in the CPI are used to measure inflation.

4. Small amounts of inflation are good as it produces higher profits which increase employment.

5. When deflation occurs, then less profits are made and employment decreases.

6. Stagflation – prices and unemployment decrease.

http://www.npr.org/templates/story/story.php?storyId=5568606

Business cycle – __________________ periods of __________ and ________________in an economy

Expansion - period of _________________from a recession

Peak - point where GDP stops going up; GDP is at its _________

Trough - point in time when real GDP stops declining and begins to expand; DGP is at its ____________

Recession - _____________in real GDP lasting for at least _________

Depression – ____________that lasts ___________________and causes a severe _________in GDP

Alternating growthrecession

recovery

highest

lowest

Decline 6 months

recession a long time

drop

II. Trade and Employment A. Net Exports

1. total # of ___________ ______ total # of ___________

2. U.S. - negative net export (_______________)

3. more ____________= more $ flowing __________ the economy

4. more exports = the economy

5. more __________= more $ goes ________

6. ___________net exports = signs of a ___________ economy

Exports Imports

trade deficit

exports INTO

imports OUT

Positive growing

increase

III. The Business Cycle (ups / downs)A. Four Main Parts1. Peak – high production; prices increase; high profit; inflation occurs; low unemployment2. Recession (contraction) – production lowers; prices begin to drop; declining profits; unemployment rising3. Trough – production, prices, and profits at their lowest; unemployment at its highest4. Expansion (recovery) – production, prices, and profit increases; unemployment decreases; tax breaks*____________- decline in GDP for 6 months or more*____________- extended period of time

recessiondepression

To say that net exports is negative is the same as saying that

a. there is a capital investment deficit

b. there is a trade deficit

c. the exchange rate has depreciated

d. there is a trade surplus

Which of the following might be a sign of economic trough?

a. low unemployment

b. recession

c. high GDP

d. stable CPI

The Consumer Price Index (CPI) is an indicator of ....

a. the size of an economyb. the velocity of moneyc. the level of inflation or deflationd. the presence of a budget deficit or surplus

The total value of all final goods and services produced in an economy is called the

a. consumer price indexb. business cyclec. net exportsd. gross domestic product

Consumers reduce spending because of a lack in confidence in the economy and the possibility of future unemployment. All else being equal, what effect will this have on the price level and GDP?

a. both price and GDP will declineb. prices will increase; GDP will be the samec. both prices and GDP will increased. prices will decrease, GDP will be unaffected

Gross domestic product is a method of calculating how much a country produces by adding which four spending categories?

a. wages, rent, interest, dividendsb. consumption, investment, government, net exportsc. consumption, investment, government, business expendituresd. consumption, interest rates, government, net exports

W - X - Y - Z -

TroughRecessionRecoveryPeakTrough

Recession

Recovery

Peak

IV. Unemployment A. Unemployment rate 1. % of total _____________________not working 2. labor force = over _____who would ______________________ 3. not counted:

a) _____________________ incapable b) _____________________ incapable c) choose not to work (___________________________)

labor force16 like to work

mentallyphysically

stay at home parent

B. Types of Unemployment

1. ________________- based on the economy (__________________)

i.e. - recessions = _______________ unemployment

expansion = ____________ unemployment

ex- home builders; mortgage lenders

2. ________________- _____________________________in the economy

i.e. - jobs not coming back or limited

ex - grocery store clerks; typewriter repair;

telephone operator

Cyclical business cycle

higherlower

Structural Complete shifts

3. ________________________- period between jobsi.e. - many factors why this happensex - college graduate; being fired; voluntarily leaving

4. ______________________- changes throughout the yearex - lifeguard; ski instructor; construction worker; retail stores

Frictional

Seasonal

In your notes, write the type of unemployment represented in each picture.

Stephanie who is a veterinarian does not like her boss. She decides to leave her job and starts looking for another clinic. What type of unemployment is she experiencing?

a. seasonalb. frictionalc. structurald. cyclical

Unemployment that occurs as a result of a recession or an economic downturn is

a. seasonalb. frictionalc. cyclicald. structural

An ice delivery person during the 1930s is no longer needed. Technology in freezers have made this job obsolete. What type of unemployment is this?

a. seasonalb. cyclicalc. frictionald. structural

A concrete worker in Duluth, Minnesota does not work during the winter months, because the moisture from the snow will not allow the concrete to cure. What type of unemployment is this?

a. seasonalb. cyclicalc. frictionald. Structural

_______________________________- total quantity of goods/services demanded at different price levels

______________________________- total value of all goods/services that all firms would produce _______________________________________- central bank of the United States

___________________________________- actions by the Federal Reserve to expand or contract the money supply

____________________________________________ – part of the Fed that regulates money supply by buying or selling government securities

Aggregate Demand

Aggregate Supply

The Federal Reserve (Fed)

Monetary Policy

Federal Open Market Committee (FOMC)

__________________________________- formula used to compute the amount of a bank’s required reserves

_______________________________- policy resulting in higher interest rates & restricted access to credit

______________________________- policy resulting in lower interest rates & greater access to credit

________________________________– the Fed buys and sells gov’t bonds in order to regulate money supply

________________________________- interest rate that the Fed charges on loans to banks

Reserve requirement

“Tight money” policy

“Easy money” policy

Open Market Operations

Discount Rate

• Monetary policy involves regulating the money supply, banks and the overall financial system. Monetary policy is conducted by a central bank which in the United States is called the Federal Reserve.

• When the economy is in a recession central bank officials will use expansionary monetary policy which seeks to reduce interest rates by expanding the supply of money in the economy.

• In turn, the lower interest rates will encourage additional aggregate demand for consumption and investment, and thus help shorten or end the recession.

• When an economy is experiencing inflation central bank officials will use contractionary monetary policy, which seeks to raise interest rates by contracting (or reducing the rate of growth in) the money supply.

V. The Federal Reserve System

A. The 'Fed'

1. fiscal vs. monetary policy

2. _________________for the US

3. owned by _______________

B. Monetary Policy

1. control of the _______________

2. control ____________(price stability)

3. encourage ___________________

4. motivation to ______________

Central bank

government

money supply

inflation

consumer spending

save

C. Organization of the Fed

1. independent of 3 branches

-annual report to _______________

2. headed by _____________________

-chairman: ______________________

-appointed by ________________

3. Federal Open Market Committee (________)

-oversee open market operations

4. ______________banks

5. __________ banks

CongressBoard of GovernorsBen Bernanke

the President

FOMC

12 Regional

Member

D. Monetary Policy (3 tools)

1.____________________- __________ required for banks to ______on hand rather than _____________

-% set by Fed (10% __________, 90% ___________)

-least used tool

- __________reserve requirement = ______in circulation - i.e. ‘__________money' policy

- ________reserve requirement = ______in circulation - i.e. ‘_______money' policy

Reserve Requirement money

keep loan to customers

reserve loan out

higher less

tight

lower more

easy

2. _______________(window) - __________ that banks pay the Fed to borrow $

-Fed is a “_____________”

-________________ borrow from banks (interest rate)

-_________ discount rate = __________interest rates

-________interest rate = ______saving; _____borrowing

-_________interest rate = ___________in $ supply

- ________________________

Discount Rate Interest rate

Bank for banks

People/businesses

higher higher

higher more less

higher decrease

“tight money” supply

3. _______________________- sale or purchase of US

treasury __________________

-___________= 'I.O.U' investment

-Fed _____securities (bonds) = ________money supply i.e. - ______$ is invested and _______is spent in the market discount rate ________along with __________rates

-Fed _______securities = ‘______money' policy

-Fed _______securities = puts $ into economy i.e. ‘_______money' policy

Open Market Operations

Bonds (aka T Bills)

Bond

sells lowers

more lessrises

interest

selling tight

buys

easy

'tight money' policy:

'easy money' policy:

G H J

F I K

Tools of the Federal Reserve System (Monetary Policy)

Boost the Economy = ____________ bonds

____________ interest rates (bank to consumer)

____________ reserve requirement (last resort)

____________ discount rate (the Fed to banks)

Cool off the Economy = ___________ bonds

___________ interest rates (bank to consumer)

___________ reserve requirement (last resort)

___________ discount rate (the Fed to banks)

buy

lower

lower

lower

sell

higher

higher

higher

Board ofGovernors

Federal OpenMarket Committee

12 RegionalFederal Reserve Banks

Numerous Member Banks

Review of Monetary Policy -Increase in interest rates = ______________ money supply

-Federal Reserve selling gov't securities (bonds) = ____________ money supply

-Decrease in the reserve requirement = ______________ the money supply -Money supply increases if interest rates ______________.

-Increase in the discount rate = money supply to _________________.

-Money supply increases if the Fed __________ securities on the open market

-Increase in the money supply will lead the discount rate to _______________.

-Decrease in the money supply if the reserve requirement _______________.

lessen

decrease

increase

decrease

decrease

buys

increase

increase

When the Fed lowers the discount rate

a. interest rates riseb. interest rates fall as wellc. banks loan less moneyd. people save more

The Fed wants to pump more money into the economy in an effort to stimulate economic growth. Which of the following actions could the Federal Reserve take to increase the money supply?

a. raise the discount rateb. raise the reserve requirementc. sell securities (bonds)d. buy securities (bonds)

Which of the following is a monetary policy that might be used to reduce inflation?

a. decreasing taxationb. decreasing the discount ratec. open market selling of bondsd. increasing government spending

To stimulate the economy, the Fed decides to increase the amount of money in circulation. Which of the following actions will they be MOST LIKELY to take?

a. raise the reserve requirementb. raise the discount ratec. sell bondsd. lower the reserve requirement

Which of these correctly completes the chart of the Federal Reserve System?

A. Federal Reserve ChairmanB. Federal Open Market Committee C. President of the United StatesD. Federal Deposit Insurance Corporation

VI. Aggregate Supply and Demand

- AS - ________ of _______________- AD - ________of ________________

Overall price level determined by AS and AD

1. AS = AD is ___________________

2. AS exceeds AD = _________

i.e. overproduction = __________

3. AD exceeds AS = ___________

i.e. prices rise = ___________

4. If AS = AD, considered a ________

economy

supply all products

demand all products

Macroeconomic equilibrium

SurplusPrices drop

Shortage

inflation

healthy

When aggregate supply exceeds aggregate demand, what most likely happens to prices in the market?

a. increaseb. market equilibriumc. decreased. inflation

When aggregate supply increases, what most likely happens to prices and output in the market?

a. increase, increaseb. increase, decreasec. decrease, decreased. decrease, increase

When aggregate demand increases, what most likely happens to prices and output in the market?

a. increase, increaseb. increase, decreasec. decrease, decreased. decrease, increase