C.2 Economics, Skill #4- Notes

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C.2 Economics, Skill #4- Notes

Analyze how macroeconomic factors (e.g., national income, employment, price stability) influence the performance of economic systems.

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Macroeconomics

study of the economy as a whole

focuses on

national output which is measured by the Gross Domestic Product (GDP)

the role of inflation

unemployment

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National Output (GDP)

GDP

most important indicator of the health of the economy and a country's income

total money value of final goods/ srvcs. that a country produces over a given period of time

Expenditures Approach

looks at the amount of new goods and services purchased in a country for a given year

what each sector in the country spends is equal to what they earn producing it

GDP = C + I + G + NX

C= Consumption (total amount of goods and services in one year)

I = Investment (total amount of investment items bought by business and individuals)

G= Goods (amount of new goods and services bought by the government)

NX= Net Exports (the difference between the goods bought by people outside of the country and the goods people in the country bought from outside of the country

When an economy is doing well, the aggregate supply is equal to the aggregate demand; however, economies have different cycles and fluctuations of aggregate economic activity

aggregate supply: amount of national output purchased

aggregate demand: amount of national output purchased

Four phases of the economic cycle

Boom: expansion of the economy that brings prosperity

Recession: a contraction of the economy with a decline in GDP and a rise in unemployment

Trough: a turning point in an economic cycle, a period in which there is a slide from the mean to the lowest point in a recession

Recovery: a period in which there is a rise from the trough back to the mean and during which there is lessening unemployment and rising prices

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Unemployment and Inflation

Indicates economy's instability that result when there is an inequality between aggregate demand and aggregate supply

Unemployment

surplus (sellers make too many goods and there aren't enough buyers) results in unemployment because sellers have to lower their production by laying off workers

governmental action is required when there is not enough spending in an economy, production slows, and unemployment rises

three types of unemployment:

frictional

occurs when workers voluntarily move from one job to another job with time in-between

examples: students entering the workforce, stay-at-home parents returning to work, people who move to new location

cyclical

economy falls as the result of a recession and businesses need to survive by laying off workers rather than cutting salaries or prices

functional

more workers than available jobs

worker skills are either not in demand or do not match industry needs

results from seasonal work

Inflation

a period in which the prices rise too quickly because a monetary unit's value has decreased and the purchasing power of that monetary unit has lessened

government intervention should try to slow the economy and encourage less spending

results from too much spending in an economy

buyers want to buy more than sellers can produce and buyers rise prices

inflation rate

the rate at which prices rise

used to determine whether economy is growing at healthy rate

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Governmental Economic Stabilization Tools

Fiscal Policy

expansionary fiscal policy

raises government spending/ decreases taxes in order to increase spending

contractionary fiscal policy

decreases government spending and increases taxes in order to decrease spending in the economy

Monetary Policy

bonds

a way for government and business to borrow money

each bond has a par value (stated/ face value; represents principal of the loan), a date to maturity (ranges from 90 days - 30yrs), a coupon (a promise to pay a certain amount of money each year to the bondholder until maturity; represents interest), and a promise to repay the par value (principal) on the maturity date

issuing government/ business sells the bonds in the bond market for a price determined by supply and demand

money received from the sale represents the principal of the loan, the annual coupon pa

in the US, the Federal Reserve System (Fed) implements monetary policy by changing the level of money in the banking system using:

open-market operations

Fed's buying/ selling of US Gov. bonds in the open market to influence the amount of reserves in the banking system and the banking system's ability to extend credit and create money

to expand the economy, Fed would buy bonds

to contract economy, Fed would sell bonds

reserve ratio

Fed can set legal reserve ratio for both member/ non-member banks to influence the level of excess reserves in the banking system and consequently the banking system's ability to extend credit and create money

to expand the economy, the Fed would reduce the reserve requirement

to contract the economy, the Fed would raise the reserve requirement

discount rate

Fed acts as a "lender of the last resort" to banks

banks needing reserves can borrow from the Fed and the interest rate that the Fed charges on these loans is called the discount rate

to expand the economy, the fed would lower the discount rate which would make it less "painful" for member banks to borrow from the Fed lead to lower interest rates/ credit requirements, a higher money supply, and greater spending

to contract economy, the Fed would raise the discount rate

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Monetary Policy Summary Table