Unit 4Macroeconomics:

PoliciesCh 13 – Economic Performance

Ch 14 – Economic Instability

Ch 15 – The Fed and Monetary Policy

Ch 16 – Achieving Economic Stability

Ch 13 – Economic Performance• GDP (Gross

Domestic Product) • The ___________ of all final goods + services

produced w/in a country’s borders in a year. USED TO ___________________________.

• It’s the most important measure of an economy’s _________________.

• _______ companies operating w/in the US are included in the GDP; however, ________ companies operating in other counties are NOT included.

• In 2008, the GDP of the US was over _____________.• What is excluded?

• _________________ (a baker buys flour to bake a pie – but only the pie is added in the GDP to avoid counting the flour twice)

• _______________________ (like homemakers)• ________________ (like used cars + homes b/c

nothing new was created)

• ____________________ (illegal activities)

• Economic sectors (Different parts of the economy)

• _______________ sector: individuals/families• ___________ sector• Represented by a “C”

• _________ sector: businesses (including sole proprietorships, partnerships + corporations)

• It’s responsible for bringing together the _________________ to produce output

• Represented by an “I”• ____________ sector: local, state, + national

• Represented by a “G”• ___________ sector: The exchange of

goods/services b/w nations • Represented by “(X-M)” (exports – imports)

• How do we determine GDP?

• By determining how much each sector ______ on goods/services, we can determine the GDP. So:

GDP = _______________

• GNP (Gross National Product)

• The dollar amount of all final goods + services produced w/ labor + property supplied by a country’s ___________. USED TO MEASURE ____________.

• Usually very close to a nation’s GDP.• ________ goods + services produced

w/ labor + property supplied by ___________ in the US.

End Section 1

• Determining inflation

• Inflation is the in the general __________.• To determine the rate of inflation, economists

create a price index (a series of prices ________________ to measure the change in price).

• To create a price index, you must have a base year (the year to which all other years’ prices are compared to) + a market basket (a representative selection of _____________ __________ goods/services). The price of the market basket is compared over a series of time to the base year which shows how prices have __________.

• Real vs. Current GDP

• To compare GDP over time, economists need to know what increases in GDP are due to increases in __________/income + what are just do to ___________.

• Current GDP is the GDP when it is _______ adjusted for inflation.

• When ____________ from inflation have been removed, it is called the real GDP.

End Section 2

• GDP + population

• Another factor which can _____ GDP data besides inflation is ________. If the population is at a faster rate than the GDP is, on average individuals aren’t ________ as much.

• GDP per capita is the measurement of the output __________ (it is NOT a measurement of ___________).

• In 2008, the GDP per capita of the US was $__________.

• Other important population factors in the economy:

• Overall ____________ growth• ________________ change (people are

born, die, + move – not in that order)• Fertility rate (the number of births that

_____ women are expected to undergo in their lifetime)

• Net _________ (includes those coming + going)

• Age – • median (average)• the _______________ (number of

children + elderly for every 100 people 16-64 – currently around 65:100)

• __________• ________

End Section 3

• Benefits of economic growth:

• It standard of living (quality of life based on _____________).

• It gov.’t spending to provide more __________.

• It ___________________ as fewer people are poor +/or unemployed

• Can provide more help for _________ nations.

• Turns us into a global ____________.

• Factors influencing economic growth

• Same as the original factors of production:• Land, _______, labor, + _____________

• Examples of things that would improve economic growth:

• _____ – more oil is discovered in Texas• ______ – a cheaper way to build cars is

discovered + $ is reinvested in the company for further developments

• _______ – the population OR could result from an increase in a population’s education/training

• Entrepreneurs – tend to flourish in areas w/ minimum gov.’t ______________

• Businesses want to productivity (the _________ use of inputs - referring to capital + labor - to create goods/services). This leads to economic growth. End Section 4

Ch 14 – Economic Instability• Business

cycles• Largely systematic ups + downs of _________.• It has 2 phases: a recession is a period during

which real GDP ______ for 2 quarters in a row (1 quarter = 3 months) + an expansion is a period of __________ from a recession.

• When the a recession reaches its _____ point, the trough, the period of expansion begins + when a period of expansion reaches its _____ point, the peak, the recession begins.

• If a recession becomes _____ enough, it turns into a depression – a state of the economy w/ large numbers of __________, shortages, + an ______________ in manufacturing plants.

or Recession

• Causes of the business cycle

• There is no one theory, but there are several factors working together which can help explain changes in the business cycle:

• ____________________: When the economy is expanding, businesses buy more capital goods (goods used to make __________ goods). When they’ve expanded enough, they stop buying capital goods, causing a loss of _______ for the makers of those goods leading to a recession.

• _____________________: Businesses hold on to more inventory when the economy is expanding + cut back during a recession.

• ________ + imitation: When a company creates a new product or discovers a more ________ way of doing business, sales go up + the economy expands. Other businesses then follow. Later, there is a slump + economic activity slows.

• _______________: The FED lowers interest rates during a recession to encourage _________ + investments, as the economy improves, interest rates are __________.

• _________________: Outside influences (such as drastic changes in the oil market).

• The Great Depression

Farm Foreclosure Rate(1920-1930)

• During 1920s, US economy appeared to be booming; however, it had flaws:1. Uneven ___________________ (Wealthiest

5% received 33% of income in 1929)• Many were too _____ to buy much of the

goods being produced.2. _______________

• Because many goods weren’t being sold, factories began _____________ workers.

• Fewer people could buy goods, led to a downward spiral.

• _______ were also overproducing w/ help of new scientific methods + machinery (also face world competition).

• Couldn’t pay off loans + weakened ________ .

• Stock

Market

Crashes

Crowd gathering on Wall Street after the 1929 crash.

• _________, NYC was the financial capital of the world.

• Stock prices had _________.• By Sept. 1929, some people began to

think ___________ were unnaturally + would soon , so they started to sell their stocks until the stock market __________.

• Everyone was selling + no one was buying.

• “______________” – Tues. Oct. 29, 1929, the market crashed.

• The Great Depression

• Stocks were worthless + many people were living in __________.

• Unemployment as production, prices, + wages .

• Thousands of _________ failed.• _____ closed + 9 mil people lost

their ______ when banks had no $.

• Many _______ lost their land b/c they couldn’t pay their mortgage.

• By 1933, ¼ of American workers were ________________.

• This prolonged business slump was The Great Depression.

• American banks began demanding repayment of their ________________ + American investors withdrew $ from _________.

• Congress placed _________ on imported goods (so people would buy American goods).

• Other countries did the same + ______________ 65%.

• Set off a world wide ___________ felt especially hard in Germany + Austria (due to war debts + dependence on American loans).

• The Great Depression didn’t end until __________.

End Section 1

Collapse of World Trade Following Smoot-Hawley Tariff of 1930

• Unemployment • The unemployed are people ________ for work who make a specific ___________ a job during the past month + worked less than 1 hr for pay or profit in the last week.

• The unemployment rate is the # of unemployed individuals divided by the total # of people in the civilian _____________.

• The unemployment rate tends to dramatically during ________ + then come down slowly afterward.

• The unemployment rate ______________ employment conditions for 2 reasons:

1. It doesn’t count those who are too _______________ to look for work.

2. It doesn’t count those who are working _______ even if they wish to gain full-time employment.

• Types of unemployment

• Frictional – caused by workers who are in b/w jobs. It is ___________ + inevitable as people change jobs frequently.

• Structural – occurs when a fundamental change in the operations of the economy _______ the demand for workers + their skills. (Ex. Changing from a manufacturing economy to one based on computer technology). This is a much more serious type of unemployment + can require a long period of ____________.

• Cyclical – occurs due to changes in the __________________.

• Seasonal – occurs due to changes in the _______ or changes in the demand for certain ________ (Ex. Construction workers).

• Technological – occurs when workers are replaced by _______ or other technology (Ex. ATMs replacing many bank tellers).

End Section 2

• Determining inflation

(From last chapter)

• Inflation is the in the general price level.• To determine the rate of inflation, economists

create a price index (a series of prices compared over time to measure the change in price).

• To create a price index, you must have a base year (the year to which all other years’ prices are compared to) + a market basket (a representative selection of commonly purchased goods/services). The price of the market basket is compared over a series of time to the base year which shows how prices have changed.

• Patterns of inflation

• Inflation tends to faster during ___________ periods of the business cycle + during ____________.

• Deflation (a in the general price level – opposite of inflation) occurs only very ________.

• In the US, deflation has occurred only after WWI + again during the ______________.

• Causes of inflation

• The _________________: all sectors of the economy try to buy more goods + services than the economy can produce causing __________ + prices.

• Another explanation blames the federal gov.’t’s ________________ (similar to the demand-pull theory).

• A 3rd explanation blames the rising cost of ______ (including labor wages) which forces manufacturers to prices.

• A 4th explanation says inflation is caused by a ____________________ of wage + price increases that is hard to stop.

• The most popular explanation is excessive _________ growth. This happens when the gov.’t increases the $ supply faster than the growth of ___________. In other words, the amount of $ in circulation is increasing more than the amount of __________________.

• Consequences of inflation

• The dollar buys ________.• Particularly difficult for people

living on a _____________ (like retired people).

• It changes spending habits which disrupts the ___________ (ex. Fewer people may be able to buy things like cars – causing some businesses to _____________).

• It alters the distribution of ________ + during long inflationary periods, it hurts ________ more than borrowers.

End Section 3

• Distribution of income

• Reasons for income inequality:• _____________• Wealth (inherited or saved)• Discrimination• __________• ____________________ (some

groups/professions may control who or how many enter it)

• Reasons why the __________ is growing (the rich are getting richer + the poor are getting poorer):

• ________________ from a goods based economy to a service based economy (services can be worth a lot or very little)

• Growing gap in ______________• Declining _________ to negotiate wages• Increasing # of _____________ families

• Antipoverty programs

• Welfare – economic + ________ programs that provide regular assistance from the gov.’t or private agencies b/c of ________.

• ___________ assistance – direct cash assistance

• __________ assistance – non-cash assistance (Ex. food stamps, Medicaid)

• ______________ programs – vary from state to state (include things like foster care, job training, family planning, etc…)

• _____________ • Enterprise zones – areas where

companies can locate free of some ____ laws (intended to help bring _______ to needy areas)

• Workfare programs – requires those receiving ______ to provide some _____ in exchange (usually community service)

End Section 4

Ch 15 – The Fed and Monetary Policy

• The Federal Reserve System (“The Fed”)

• Created in 1913 to act as the ______ _______ of the US.

• What does it do?

• Provides ________________ to the gov.’t

• _________ financial institutions

• Maintains the payments system

• Enforces consumer _________ laws

• Conducts _________________

• Structure of the Fed

Ben Bernanke Chairman of the Fed

• It’s privately owned by its member banks (commercial banks that are members of, + hold ________ in the Fed).

• Individual banks may or may not belong to the Fed.

• The Board of Governors sets the _________ _________ for the Fed + its member banks to follow, conducts some aspects of monetary policy, + makes a report each year to ____________.

• The Board has 7 members appointed by the ________ + confirmed by the _____. They serve 14 yr terms that are staggered w/ a new member being appointed every ________.

• The Chairman of the Fed is one of the 7 Governors who reports to Congress twice a year.

• 12 Federal Reserve District Banks serve the same function for member banks that those banks serve for the ______ (loaning $, holding deposits, etc…).

• Regulatory responsibilities

• Regulates + monitors the $ its members hold in __________.

• Serves as a responsible banking practice + to control the ________________.

• Supervises + regulates ________ ________ w/in the US + the international operations of US member banks.

• Has other regulatory responsibilities as well…

• Other services

• ___________________ • The District Federal Reserve System Bank

takes $ from the account of the person who’s written the check + transferring it into the bank of the person who’s cashed the check.

• Enforcing __________________• Requires lenders to explain purchases made

on credit – ex. down payment, the # + size of monthly payments, + the total amount of interest paid over the life of the loan, etc…

• ______________ currency + coins • Puts new $ into circulation + destroys

mutilated currency.

• Providing ______________ to the gov.’t • Serves as the federal gov.’t’s bank – ex.

maintains accounts for the IRS.

End Section 1

• Monetary policy • The expansion or contraction of the $ supply in order to influence the cost + the availability of ________ (including loans).

• The fractional reserve system requires banks to keep a fraction of their deposits in their banks.

• The legal reserves are the $ that the banks hold in their _______ + at the Federal Reserve district banks.

• The reserve requirement is the rule that says what percentage of every _______ must be set aside as legal reserves.

• It is usually around _____%.

• Excess reserves are any extra $ a bank has over the reserve requirement + may be __________________ by the bank.

• This $ is either invested or loaned out + banks make a ____ from the interest on those loans.

• Major tools of the monetary policy

1. __________________________- The Fed is usually reluctant to use this tool b/c the others tend to work better.

2. Open Market Operations - buying/selling of gov.’t ____________ (stocks + bonds).

- The most ______________ tool.

3. Discount Rate – the interest the Fed charges on ________ to financial institutions.

- They take out loans to cover a higher # of seasonal loans to

their customers or to cover a ________ in their reserve requirements.

• How these tools are used depends on whether the Fed is operating under a _____ money policy or a _____ money policy.

• Easy $ policy • the Fed wants to ________ the economy by encouraging people to spend, invest, + take out loans.

• Reserve requirements – to _________ spending, investing, + loaning, the Fed would the reserve requirement so more $ would be out in circulation.

• Open market operations – to put more $ in circulation the Fed _______ securities.

• Discount rate – is to ___________ financial institutions to take out loans (so that they can loan more $ to their customers + put more $ in circulation).

• Tight $ policy • the Fed wants to ______ the $ in circulation – to help prevent _______ – by discouraging spending, investing, + loans.

• Reserve requirements – to _________ spending, investing, + loaning, the Fed would the reserve requirement so less $ would be out in circulation.

• Open market operations – to $ in circulation the Fed ______ securities.

• Discount rate – is to ___________ financial institutions from taking out loans (so that they can loan less $ to their customers, so that less $ is in circulation).

• Moral suasion

• The use of _____________ (such as announcements, press releases, articles, + ____________ before Congress).

• A ______ monetary policy tool of the Fed’s.

• Bankers try to ______ what the Fed is preparing to do w/ the monetary policy + will often react based on ____________________ by the Fed.

End Section 2

• Impact of monetary policy

• Other monetary policy issues

• Short-term – affects ___________ (the price of credit).

• Long-term – affects the general level of ______.

• Having too much $ in circulation leads to ___________.

• Known as the Quantity Theory of $.

• ________ – effects of changes in the monetary policy can take months or years to be felt. Makes it _____________ how well it’s working.

• Burden – may affect some ________ more than others (especially those sensitive to the need for loans like cars + houses).

• ________ spending habits – if people take out more loans today they’ll have less $ to spend in the future. Also, expectations of future ______ lead to people spending more $ now.

End Section 3

Ch 16 – Achieving Economic Stability

• Economic instability

• Can take the form of a __________, high ______________, +/or inflation.

• Stagflation is a period of _______ (no growth) economic growth combined w/ __________.

• Costs of economic instability include: loss of __________ (leading to a loss of tax $), uncertainty among producers + consumers, wasted _________, political instability, higher crime rates, etc…

End Section 1

• Macroeconomic equilibrium

• Aggregate supply is the ________ of goods + services that all firms would produce in a specific period of time at various price levels.

• If the period was exactly 1 yr, + if production took place w/in a country’s borders, then aggregate supply would be the same as GDP.

• Aggregate demand is the ____________ of goods + services demanded at different price levels.

• Macroeconomic equilibrium is the level of real GDP consistent w/ a given price level. In other words, it is where total production + demand are at the _____________.

• On a graph, it is where aggregate supply + aggregate demand _______.

End Section 2

• Achieving economic stability: demand-side policies

• Federal policies designed to or total __________ in the economy.

• Fiscal policy – the gov.’t’s attempt to ______ the economy through taxing + gov.’t spending.

• Ex: In a recession, the gov.’t would need to spend more $ to __________ the economy.

• Automatic stabilizers are programs that automatically trigger _______ if changes in the economy threaten ___________.

- Ex. Unemployment insurance, Entitlement programs (like welfare), + the income tax.

• Achieving economic stability: supply-side economics

• Policies designed to stimulate output + lower unemployment by __________ instead of demand.

• Also known as “Reaganomics” or the “__________ theory” – benefits that start w/ companies lead to greater profits + more jobs, so the benefits trickle down to _____________.

• The gov.’t’s role is much _______. • the # of gov.’t agencies• _____________ – fewer

regulations promote production.

• ________ – especially on businesses.

• Supply-side economics tend to promote economic ________ more than stability.

• Achieving economic stability: monetary policies

• Focuses on __________ the economy by controlling the $ supply – this is what we covered earlier w/ the Fed in Ch 15.

• This method is often favored b/c both demand + supply-side economics can be difficult to enact due to _______________ in Congress.

End Section 3

• Fiscal policy • (The gov.’t’s attempt to stabilize the economy through taxing + gov.’t spending) It involves planning a _______ that has either surpluses or deficits that are intended to maintain a steady level of ___________ in the economy.

• 3 types:• _____________ – policy that someone

must CHOOSE to implement. • __________ – does not require new or

special action to go into effect (ex. unemployment, social security, etc…).

• __________ – plans + programs put in operation to strengthen the economy in the ________ (ex. Health care, banking laws, etc…).

• Reasons for differing opinions among economists

• Different ________ about what is ____________ (one might believe unemployment is the more important problem while another might say inflation, etc…).

• Different times – economists, like all people, are shaped by the ______ _________ they grew up in.

End Section 4