Econ Department Final Unit Three Macroeconomics Prepping for Success!
Econ Department Final Exam Your Economics Departmental Final Exam is cumulative and will count as 5% of your class grade. Following is our Review Schedule: Tuesday we ll review Unit One and Unit Two Wednesday we ll review Unit Three and Unit Four Thursday we ll review Unit Five and finish with a wrap-up game!
Econ Department Final Exam Econ Study Cards To help you, you ll create one Study Card per unit. You can write as much as you want on each index card front and back They will help you study and prepare! Each Study Card will count for a classwork grade 25 points/study Card Your Name on each card Unit 1, 2, 3, 4 or 5
Complete Your Study Card As You Review! As you review each unit, capture key information on your Study Card. At the end of each unit review, there will be questions you have to answer. These will receive a grade, so take them seriously! Hint everyone should make a 100% because you can go back and find the answer if you don t know it!
Here s Your Timing First half of class (45 min.) 30-35 minutes review the unit and capture important info on your index card 10-15 minutes answer the review questions When you re done, come show me your index card and I ll give you the access code for the next unit to review. Second half of class (45 min) 30-35 minutes review the unit and capture important info on your index card 10-15 minutes answer the review questions
Unit Three Review Each Unit Review will unpack our unit learning standards to help you understand what you need to know. We ll take each learning standard and break it down. Please pay particular attention to the bold/colored words and make sure you include this information on your Unit Summary Index Card.
Unit 3 Learning Standard #1 of 3 SSEMA1 Illustrate the means by which economic activity is measured. a. Identify and describe the macroeconomic goals of steady economic growth, stable prices, and full employment. b. Define Gross Domestic Product (GDP) as the sum of Consumer Spending, Investment, Government Spending, and Net Exports (output expenditure model). c. Define unemployment rate, Consumer Price Index (CPI), inflation, real GDP, aggregate supply and aggregate demand and explain how each is used to evaluate the macroeconomic goals from SSEMA1a. d. Give examples of who benefits and who loses from unanticipated inflation. e. Identify seasonal, structural, cyclical, and frictional unemployment. f. Define the stages of the business cycle, including: peak, contraction, trough, recovery/expansion as well as recession and depression.
Economic Freedom Consumers and producers make their own economic decisions Choose their own occupations, employers, and uses for their money Choose what, where, and how to produce Economic Efficiency Use scarce resources well and not wasteful Economic Equity/Equality Equal pay for equal work People are fair in both their purchases and sales
Economic Security Protection from adverse events such as layoffs and illnesses Social Security Full Employment Provide as many jobs as possible Price Stability Prices do not go up or down too much, too often Inflation general rise in prices Deflation general fall in prices (dollar worth less) Economic Growth More jobs means more money for people
Macroeconomics Macroeconomics gives us a overall view of economic activity Macroeconomics is the study of the whole economy together the aggregated (everything added up) spending, saving, and investing decisions of all consumers and businesses These factors together households, businesses, government, and net exports describe the health of the economy as a whole!
Key Economic Indicators The health of the economy and the big picture of economics is measured in several ways These include: Gross Domestic Product (GDP) The Consumer Price Index (CPI) This is a measure of the rate of inflation Unemployment
Gross Domestic Product (GDP) To compare our system with other countries systems, and to compare the strength of our own economy year to year, economists use something called the Gross Domestic Product (or GDP), which is the total dollar value of all final goods and services produced within a country during one calendar year.
Gross Domestic Product (GDP) GDP is measured by assessing the total expenditures (spending) of four different economic sectors: 1. Consumers (C) Consumer Spending 2. Government (G) Government Spending 3. Investment (I) Investments from Industry 4. Net Exports (NX) Exports Minus Imports
Gross Domestic Product
Famous Economic Formula GDP= C+G +I+(X-M) C= Personal consumption expenditures (consumer spending). Includes durable goods: a lifetime of more than one year, and non-durable goods: a lifetime of less than one year, and services.
Durable vs. Non-Durable Goods
G = Government Purchases The dollar amount that federal, state, and local governments spend on items IE: highways, education, defense, etc.
Government Purchases Levels of Spending Federal/National State City
I = Capital Investment Total value of all capital goods investment/purchases in a given nation during one year. Fixed investment: Buildings, machinery, equipment Inventory investment: raw materials, intermediate goods, final goods
Investment Fixed Investment Inventory Investment Raw Materials Intermediate Goods Finished Goods
Net Exports The reason we subtract our imports from our exports is this: Exports - The money other countries spend on our exports adds value to our economy Imports - The money we spend on goods imported from other countries takes money out of our economy So, the net export expenditure is calculated only when the transactions add value to our economy!
Exports vs. Imports Goods & services made in our own country Other countries buy them & add to our economy Goods & services made in other countries When we buy other countries goods & services it does NOT add to our economy
GDP does NOT include: value of used products value of volunteer work purely financial transactions value of intermediary goods Transfer of assets Value of non-market activities (DIY) Underground economies (anything not reported to the government
Unemployment To again monitor the health of our economy, economists measure the Unemployment Rate. Each month, they survey certain Americans to find out their employment status. The U.S. Government defines employed as people 16 and older meeting one or more of the following criteria.
Criteria to be considered Employed 1. Working for pay or profit for 1 or more hours this week. 2. Working without pay in a family business 15 or more hours. 3. Having a job, but being ABSENT due to illness, weather, vacation, etc.
The U.S. Government defines Unemployed" as: 1. NOT meeting any of the criteria above AND 2. ACTIVELY looking for work during the past 4 weeks. The most closely watched and highly publicized labor force statistic is the UNEMPLOYMENT RATE=the percentage of people in the civilian labor force who are UNEMPLOYED.
Measuring Unemployment Unemployment rate = unemployed labor force x 100
Why is there Unemployment? In the end, unemployment depends on supply and demand the supply of able workers and the demand by businesses for those employees Some, but not all, unemployment is the result of a downturn in the economy a change in supply or demand Economists classify four different types of unemployment
4 Types of Unemployment Structural Cyclical Frictional Seasonal
STRUCTURAL Unemployment Unemployment that occurs as a result of changes in technology, consumer preferences, or in the way the economy is STRUCTURED. EX: Many TV repairmen had to find new work as televisions are now built with transistors instead of tubes.
CYCLICAL Unemployment This unemployment results from contractions in the economy. This type of unemployment HARMS the economy more than any other types of unemployment. During the Great Depression, the unemployment rate reached an all time high of about 25%. As recently as 2009 and 2010, the unemployment rate reached 10.2%.
FRICTIONAL Unemployment People who have decided to leave one job and LOOK for another typically better job. Also, new entrants and re-entrants into the LABOR FORCE. Economists consider frictional unemployment as a NORMAL part of a healthy and changing ECONOMY.
SEASONAL Unemployment This predictable unemployment fluctuates as a result of HOLIDAYS, school breaks, and industry PRODUCTION schedules.
Consumer Price Index The Consumer Price Index (CPI) is a measure of the change in prices in an economy Economists add up the total price of a market basket of typical items bought by the average family in a month Then, they compare the total price of these goods to the total price of the same items during a base period (or previous year) by dividing the total by the base Then, they multiply the result by 100 to have an index figure for comparison purposes CPI = cost of today s market basket cost of a market basket in previous time X 100
Let s Look at an Example Let s say that in 2006, a year that we would like to serve as our base year, the market basket cost $960 Then, we measure the same goods again in 2007 and find that they cost $1000 So, it works out like this: CPI = 1000 960 CPI = 1.04 X 100 CPI = 104 X 100 Remember, this number is an index figure. By itself, it doesn t tell us much. We compare it to 100 (the base number integer that is always used) to figure out the percentage change!
Inflation and Growth On the other hand, if prices increase but the economy does not grow, a condition called stagflation occurs. Stagflation is when there is high inflation, the economic growth rate slows and unemployment remains high.
Inflation and Growth High inflation hurts wage earners because the money they make is now worth less Some businesses may offer cost-of-living adjustments for their employees to balance out the effects of inflation
What Have We Learned So Far? GDP Definition The total dollar value of all final goods and services produced within a country during one calendar year. Formula C + G + I + NX = GDP What does it measure? Output, productivity, growth We measure spending, because if people are buying then someone s making it, too!
What Have We Learned So Far? Inflation What is it? Measured by CPI Consumer Price Index What is the Market Basket? Purchasing Power how far does our money go? When prices/inflation goes up what happens to our purchasing power? Purchasing Power goes down When prices go down what happens to our purchasing power? Purchasing Power goes up Winners and Losers Winners ex. Borrowers Losers Lenders/Banks
What Have We Learned So Far? Unemployment What s employed? What defines unemployment? 4 types Frictional normal, got the training, in between jobs Structural Job is outsourced, replaced by tech, need new training Cyclical worst kind, downturn in overall economy forces layoffs Seasonal Part-time, holidays only, peak sales periods
Now That We Understand Our Measurements Measures Growth, Output, Productivity Unemployment Inflation/Costs Measurement Tool GDP Unemployment Rate CPI Now we need to see what the measurements tell us!
By Understanding the Measurements We Understand the Health of Our Economy Economies flow in a continuous rhythm of good times and not-so-good times
What s a Cycle? Does a roller coaster car every go away from the tracks? I hope not! Does the roller coaster car keep going around & around? Well, yeah! So that s how a roller coaster is like a cycle it keeps going around and around!
A Business Cycle Keeps Going Round and round, but with some ups and downs! Today we re going to look at those ups and downs.
Business Cycles Fluctuations in Real GDP are referred to as Business Cycles. The duration and intensity of each phase of the Business Cycle are not always clear. Business Cycles are typical of Market, Capitalistic economies due to the free nature of those economic systems
Phases of the Business Cycle Expansion/Recovery Peak Contraction/Recession Trough
Expansions Expansions are periods of increasing Real GDP. Unemployment decreases, businesses expand, and Personal Consumption increases. As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates.
A Word About Interest Rates The amount of money charged as a fee for lending money. The price of borrowing money. As interest rates rise LESS consumers will borrow money IF they are WILLING and ABLE As interest rates fall MORE consumers will borrow money IF they are WILLING and ABLE
Peak A peak is a period when the economy starts to level off. Businesses postpone new investments, and consumer saving tends to increase. Rising prices and interest rates tend to restrict purchases and investments, often leading to a Contraction.
Contraction A Contraction is a period of declining Real GDP. Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours. Interest rates and prices level off, and often decline during long contractions.
Long Term Contractions Recession: Six months of declining Real GDP Depression: Twelve months of declining Real GDP coupled with at least 15% unemployment.
Trough A Trough is the bottom of a Contraction. Lowest interest rates and prices bring customers back to markets.
% Change in Real GDP Peak Expansion 0% Contraction Trough
Unit 3 Learning Standard #2 of 3 SSEMA2 Explain the role and functions of the Federal Reserve System. a. Explain the roles/functions of money as a medium of exchange, store of value, and unit of account/standard of value. b. Describe the organization of the Federal Reserve System (12 Districts, Federal Open Market Committee (FOMC), and Board of Governors). c. Define monetary policy. d. Define the tools of monetary policy including reserve requirement, discount rate, open market operations, and interest on reserves. e. Describe how the Federal Reserve uses the tools of monetary policy to promote its dual mandate of price stability and full employment, and how those affect economic growth.
Functions of Money Money is any good that is widely accepted in exchange of goods and services, as well as payment of debts. Three functions of money are: 1. Medium of exchange: Money can be used for buying and selling goods and services. If there were no money, goods would have to be exchanged through the process of barter (goods would be traded for other goods in transactions arranged on the basis of mutual need). Such arrangements are often difficult. 2. Unit of value: Money is the common standard for measuring relative worth of goods and service. 3. Store of value: Money is the most liquid asset (Liquidity measures how easily assets can be spent to buy goods and services). Money s value can be retained over time. It is a convenient way to store wealth.
Functions of Money Unit of value Store of value Medium of exchange
Characteristics of Money Portable Durable Divisible Uniform Limited Acceptable
Money Credit Cards Credit cards represent a loan. The card (or the number) is simply a way to access a line of credit. On the other hand, a debit card is a way to spend checkable deposits, just like a paper check.
Money, Money, Money! As you have learned, the economy operates around money Before 1913, hundreds of national banks could print as much paper money as they wanted, as often as they wanted! They could also loan out money when times were good, or refuse to loan money when times were bad These practices made huge profits for bankers, but greatly hurt the economy as a whole! So, the government created a solution
The Federal Reserve System A special bank, referred to as The Federal Reserve ( the Fed ), was established in 1913 to help control the money supply (or, the amount of money) in the economy These tasks are called monetary policy or, the regulation of the amount of money available in the economy The Fed does this in order to promote economic growth and full employment to limit the impact of inflation and recessions These are called the goals of monetary policy!
Other Fed Responsibilities Another huge task that the Fed is responsible for is controlling what the banks can and cannot do They do this to make sure that banks are all playing by the same rules! The most important job is to tell the banks how much of their money must be held in the form of reserves Reserves are money that the bank must keep in its vault instead of loaning out for a profit! Why do you think it s important for banks to hold some money as reserves?
Structure of the Fed The Fed is often discussed as the nation s central bank but, it is actually a system The Federal Reserve System is made up of 12 different banks in various regions of the nation Each of these banks is able to print paper money, called Federal Reserve Notes The system as a whole is run by a Board of Governors, who are appointed by the U.S. President The Chairman of the Federal Reserve is Janet Yellen The monetary policy of the Fed is decided and enforced by the Federal Open Market Committee (FOMC)
Organization of the Federal Reserve
Tools of the Federal Reserve The Federal Reserve has several tools they can use to help our economy: 1. Federal Open Market Committee 2. Reserve Requirements 3. Discount Rate
Federal Open Market Committee (FOMC) Regulates the money supply by buying and selling securities, or bonds Securities or bonds are documents issued by the government for which you pay a set price now, in exchange for a higher fixed amount (called the face value ) later When securities are bought and sold, this is called an open-market operation A bond usually matures or can be exchanged for its face value in 5, 10, or 20 years
Federal Open Market Committee (FOMC) When the economy is in a recession, the Federal Reserve will try to stimulate consumer demand by increasing the money supply The money that it pays for these securities then goes into the banking system, and thus, increases the money supply to the public When banks have more money to lend, they lower their interest rates Down the line, the point of the Fed s actions are to encourage economic growth!
Remember Inflation? Sometimes, though, the problem in the economy is that it s growing too fast This leads to a rapid increase in prices, and could lead to overproduction Then, the Fed will sell bonds to the public, and keep the money they pay for them as reserves in their vaults This lowers the money supply available to the public in order to curb inflation and control production rates (leads to higher interest rates) So, the use of securities is a give and take!
Reserve Requirements Another tool of the Federal Reserve is reserve requirements. Reserve requirements are the amount of consumer deposits that banks have to hold in reserve for an average amount of daily withdrawals. Acts as a protection from runs on the bank Our current reserve requirements are 10%.
Reserve Requirements If the Fed wants to increase the money supply they can lower the discount rate Banks have more money to lend out If the Fed wants to decrease the money supply they can increase the discount rate Banks have less money to lend out
One More Task The Fed may also regulate the money supply through the discount rate The discount rate is the interest rate that the Federal Reserve charges other banks to lend them money When the discount rate is high, banks don t borrow as much money and they charge higher interest to the public (lower money supply) When the discount rate is low, banks want to borrow more money to make more profit on loans (higher money supply)
Let s Review Monetary Policy! Word Clues Monetary Policy = Money Supply in Economy Federal Reserve Tools They Use: Federal Reserve Monetary Policy Tools FOMC Open Market Buying/Selling Govt Bonds Reserve Requirement How much $$ banks have to reserve for withdrawals Ways They Can: Increase Money Supply Buy Bonds (more money in the economy) Lower Reserve Requirement (banks can loan out more money) Ways They Can: Decrease Money Supply Sell Bonds (less money in the economy) Increase Reserve Requirement (banks has less money for loans) Discount Rate interest rate the Fed charges member banks for loans Lower Discount Rate (Cheaper to borrow money) Raise Discount Rate (more expensive to borrow money)
Unit 3 Learning Standard #3 of 3 SSEMA3 Explain how the government uses fiscal policy to promote price stability, full employment, and economic growth. a. Define fiscal policy. b. Explain the effect on the economy of the government s taxing and spending decisions in promoting price stability, full employment, and economic growth. c. Explain how government budget deficits or surpluses impact national debt.
What is Fiscal Policy? Fiscal policy is the government s attempt to influence or stabilize the economy through taxing and government spending Fiscal Policy, think Government as in Congress Only Congress can tax Only Congress can spend tax dollars
When I Say Government, I Mean Legislative Branch/Congress is responsible for government spending (with Presidential approval)
Try Not To Get Confused! Type Controlled By Tools Fiscal Policy Government/Congress 1. Taxing 2. Spending Monetary Policy Federal Reserve Money Supply 1. Open Mkt Operations 2. Reserve Requirements 3. Discount Rate
Demand Side Policies Fiscal policies are designed to increase employment by stimulating demand
How does the Government get involved? The govt. is the only thing big enough to offset a downward spiraling economy The govt. can undertake its own spending to offset the spending in other parts of the economy like businesses The government can also lower taxes to increase borrowing and push consumers to spend more So, if business spending was down $50billion the government might spend $10 billion building a dam, $20 billion in grants to fix neighborhoods, and $20 billion in other ways This spending would offset the $50 billion that businesses did not spend
Or instead of spending, the government could just reduce taxes giving consumers and businesses more purchasing power
Supply Side Policies Designed to stimulate output and lower unemployment by increasing production NOT by stimulating demand The key goal here is to reduce the governments role in the economy Reducing federal agencies Less government spending Deregulating firms allowing them to produce at full capacity
Measuring the Economy Review: What other ways have we discussed that measure economic health? Gross Domestic Product (GDP) Unemployment (Unemployment Rate) Inflation (CPI) Many economists also measure the economy by looking at the government s budget The government s budget is based on how much money it will spend compared to how much money it will take in through taxes What do you think is the goal of the budget?
The Deficit and Debt If the government spends more money than it takes in for the year, it is operating under a budget deficit This is more of a prediction the idea that the government will have less money in the end If the government has a deficit, it needs to borrow money to finance the difference this is called the national debt It is all of the money that the government borrows to make up for the extra money it spends!
The National Debt Like any borrower, the government must pay interest on its debt Today, a big chunk of the government s tax revenues go towards paying this interest (in other words, taxes go towards paying for money that the government has already spent) Because money is going towards interest instead of goods and services, these payments limit the growth of the nation s GDP Thus, economists look at the deficit and debt to continue measuring our economic health
National Debt Each time the government borrows money it adds to the national debt, the total amount of money owed by the federal government. Is the sum of all past deficits plus interest.
Government Deficits When the government spends more money in a fiscal year than it has brought in
National Deficit vs. National Debt
Deficit vs. Debt
Aggregate Demand & Supply In individual markets, supply and demand interact to establish prices. In the nation as a whole, aggregated supply and aggregated demand interact to determine whether the economy is growing or declining.
What is this?? What Does It Tell Us? What s the Difference?? Supply and Demand in Microeconomics
A Lot Alike, A Little Different
How is Aggregate Supply and Aggregate Demand Different? (than Regular Supply and Demand)? Main difference is that aggregate demand and aggregate supply are plotted based on total output, measured as GDP. So
Now Let s Review Monetary Policy Vs. Fiscal Policy Who s in Control Federal Reserve Who s in Control Government/Congress Day-to-Day most Important is the FOMC
Now Let s Review Monetary Policy Vs. Fiscal Policy Tools to Use Tools to Use #1 FOMC - Buying/Selling Bonds #1 Taxing #2 Reserve Requirement #2 Spending #3 Discount Rate
Now Let s Review Monetary Policy Warming Up in Contraction/ Recession Economic Needs Cooling Down inflation high, nearing Peak Fiscal Policy Warming Up in Contraction/ Recession Economic Needs Cooling Down inflation high, nearing Peak Econ Talk: Expansionary Econ Talk: How To Do It? (Big Picture) Contractionary How To Do It? (Big Picture) Econ Talk: Expansionary Econ Talk: How To Do It? (Big Picture) Contractionary How To Do It? (Big Picture) Increase money supply Decrease money supply Increase money supply Decrease money supply Talking Details #1 Buy Bonds Sell Bonds Lower Taxes Raise Taxes Talking Details #2 Lower Reserve Requirement Increase Reserve Requirement Increase spending Decrease spending Talking Details #3 Lower Discount Rate Increase Discount Rate