SSEMA1, SSEMA2, SSEMA3-EOCT Review

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SSEMA1, SSEMA2, SSEMA3-EOCT Review
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SSEMA1-A.The Components of GDP

• Recall GDP is total spending.
• Four components
• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (NX)
• These components add up to GDP (denoted Y)

Y C I G NX
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U.S. GDP and Its Components, 2007
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A C T I V E L E A R N I N G 1 GDP and its
components

• In each of the following cases, determine how
  much GDP and each of its components is affected
  (if at all).
• A. Debbie spends 200 to buy her husband dinner
  at the finest restaurant in Boston.
• B. Sarah spends 1800 on a new laptop to use in
  her publishing business. The laptop was built in
  China.
• C. Jane spends 1200 on a computer to use in her
  editing business. She got last years model on
  sale for a great price from a local manufacturer.
  
• D. General Motors builds 500 million worth of
  cars, but consumers only buy 470 million worth
  of them.

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A C T I V E L E A R N I N G 1 Answers

• A. Debbie spends 200 to buy her husband dinner
  at the finest restaurant in Boston.
• Consumption and GDP rise by 200.
• B. Sarah spends 1800 on a new laptop to use in
  her publishing business. The laptop was built in
  China.
• Investment rises by 1800, net exports fall by
  1800, GDP is unchanged.

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A C T I V E L E A R N I N G 1 Answers

• C. Jane spends 1200 on a computer to use in her
  editing business. She got last years model on
  sale for a great price from a local manufacturer.
  
• Current GDP and investment do not change,
  because the computer was built last year.
• D. General Motors builds 500 million worth of
  cars, but consumers only buy 470 million of
  them.
• Consumption rises by 470 million, inventory
  investment rises by 30 million, and GDP rises
  by 500 million.

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SSEMA1-B.

• Gross Domestic Product (GDP)
• the total value of all final goods and services
  produced in the US
• Economic Growth
• Growth allows successive generations to have more
  and better goods and services than their parents.
  An increase in standard of living
• Unemployment
• The percentage of the nations labor force that
  is out of work

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SSEMA1-B.

• Consumer Price Index (CPI)
• A price index determined by measuring the price
  of a standard group of goods meant to represent
  the market basket of a typical urban consumer
• Inflation
• The general rise in price levels
• Stagflation
• A decline in real GDP combined with a rise in the
  price level
• Aggregate Supply
• The total amount of goods and services in the
  economy available at all possible price levels
• Aggregate Demand
• The total amount of goods and services in the
  economy that will be purchased at all price
  levels.

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SSEMA1.-C. Real GDP Per Capita
Real GDP is the value of the total production of
goods and services within a country during a
particular period time (usually one year). The
number is adjusted for inflation so one years
production can be compared with anothers. Per
Capita GDP is the GDP figure divided by the
population of the country
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Real versus Nominal GDP

• Inflation can distort economic variables like
  GDP, so we have two versions of GDP One is
  corrected for inflation, the other is not.
• Nominal GDP values output using current prices.
  It is not corrected for inflation.
• Real GDP values output using the prices of a
  base year. Real GDP is corrected for inflation.

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EXAMPLE
Pizza Pizza Latte Latte
year P Q P Q
2005 10 400 2.00 1000
2006 11 500 2.50 1100
2007 12 600 3.00 1200

• Compute nominal GDP in each year
• 2005 10 x 400 2 x 1000 6,000
• 2006 11 x 500 2.50 x 1100 8,250
• 2007 12 x 600 3 x 1200 10,800

Increase
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EXAMPLE
Pizza Pizza Latte Latte
year P Q P Q
2005 10 400 2.00 1000
2006 11 500 2.50 1100
2007 12 600 3.00 1200

• Compute real GDP in each year, using 2005 as the
  base year

Increase
2005 10 x 400 2 x 1000
6,000 2006 10 x 500 2 x 1100
7,200 2007 10 x 600 2 x 1200 8,400
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SSEMA1-C. Inflation etc.

• Inflation rise in general price level
• change in price level
• Inflation rate beginning price level x
  100
• Creeping inflation 1-3 per year
• Galloping inflation intense 100-300 per year
• Hyperinflation 500 per year and above
• Deflation decrease in general price level

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EXAMPLE
year Nominal GDP Real GDP
2005 6000 6000
2006 8250 7200
2007 10,800 8400

• The change in nominal GDP reflects both prices
  and quantities.

• The change in real GDP is the amount that GDP
  would change if prices were constant (i.e., if
  zero inflation).

Hence, real GDP is corrected for inflation.
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SSEMA1-C. Who is Unemployed?

• Three criteria
• Available for work
• made specific effort to find a job in the past
  month
• Worked for pay lt 1 hour in the past week (people
  with part-time jobs are considered employed)

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SSEMA1-C. Unemployment

• unemployment rate calculation
• Number of unemployed individuals
• Total of persons in civilian labor force

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How the CPI Is Calculated
0

1. Fix the basket.The Bureau of Labor Statistics
   (BLS) surveys consumers to determine whats in
   the typical consumers shopping basket.
2. Find the prices.The BLS collects data on the
   prices of all the goods in the basket.
3. Compute the baskets cost.Use the prices to
   compute the total cost of the basket.

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How the CPI Is Calculated
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1. Choose a base year and compute the index.The CPI
   in any year equals

1. Compute the inflation rate.The percentage change
   in the CPI from the preceding period.

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EXAMPLE
0

• basket 4 pizzas, 10 lattes

cost of basket
10 x 4 2 x 10 60
11 x 4 2.5 x 10 69
12 x 4 3 x 10 78
Compute CPI in each year 2007 100 x (60/60)
100 2008 100 x (69/60) 115 2009 100 x
(78/60) 130
Inflation rate
using 2007 base year
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A C T I V E L E A R N I N G 1 Calculate the
CPI
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price of beef price of chicken
2004 4 4
2005 5 5
2006 9 6
CPI basket 10 lbs beef, 20 lbs
chicken The CPI basket cost 120 in 2004, the
base year.
A. Compute the CPI in 2005. B. What was the CPI
inflation rate from 2005-2006?
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A C T I V E L E A R N I N G 2 Answers
CPI basket 10 beef, 20
chicken Household basket in 2006 5 beef,
25 chicken
beef chicken cost of CPI basket
2004 4 4 120
2005 5 5 150
2006 9 6 210
A. Compute cost of the 2006 household
basket. (9 x 5) (6 x 25) 195
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A C T I V E L E A R N I N G 2 Answers
CPI basket 10 beef, 20
chicken Household basket in 2006 5 beef,
25 chicken
beef chicken cost of CPI basket
2004 4 4 120
2005 5 5 150
2006 9 6 210
B. Compute increase in cost of household basket
over 2005-6, compare to CPI inflation rate. Rate
of increase (195 150)/150 30 CPI
inflation rate from previous problem 40
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SSEMA1-D.Types of unemployment

• Frictional Unemployed people dont always take
  the very first job they can find. They often wait
  to find a job that fits their talents and
  preferences. While they search for a job that is
  a good fit, these people are frictionally
  unemployed. Other people sometimes purposefully
  decide to leave a job and look for one that
  better fits their interests and abilities. These
  job seekers are also considered frictionally
  unemployed. Overall, frictional unemployment is
  not entirely bad for an economy because it gives
  people time to find a job that suits their needs.
• Structural Structural unemployment occurs when
  you have job skills that no one wants, or when a
  company wants to hire somebody but cant find
  anyone who has the necessary requirements.
  Suppose you worked at a company that made
  old-fashioned phones with dials. Almost no one
  wants these phones anymore, so once your company
  closes there is no place for you to use your
  old-fashioned-phone-making skills. At the same
  time, suppose that a local company needs people
  who can design computer networks, but no one in
  the community has experience in this area. This
  type of mismatch is a typical example of
  structural unemployment.

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Unemployment- continued

• Cyclical Most economies encounter cyclical
  periods of growth and recession. During boom
  years, unemployment drops dramatically as
  companies hire new workers to match the higher
  demand. However, boom periods often overreach,
  and these are followed by recessions. People who
  are laid off as a result of a contracting economy
  are cyclically unemployed.
• Seasonal due to changes in weather or change in
  demand for certain products

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You might find a question like the following on
the EOCT

• Peggy, a recent college graduate, decides
• to look for a job instead of going to
• graduate school. If she is unable to find a
• job that suits her interests right away,
• what type of unemployment is she MOST
• likely experiencing?
• A structural
• B seasonal
• C frictional
• D cyclical

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Answer to sample question

• While Peggy may be experiencing
• cyclical unemployment because of a
• downturn in the economy, the question
• notes that she is trying to match her
• skills with a job that she wants.
• Therefore she is experiencing frictional
• unemployment (choice C).

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SSEMA1-E.Cycle Phases Recession Depression

• Recession real GDP decreases for 2 quarters (6
  months) in a row
• Depression severe recession w/3 more elements
• Very high unemployment
• Acute shortages
• Excess manufacturing capacity (idle or partially
  unused factories)

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SSEMA1-E.Cycle Phases

• As GDP increases, there is expansion. When
  expansion reaches a peak, recession begins.
  Recession ends at the trough, and expansion (and
  recovery) begin at that point.

The British call the peak a boom We call the line
above the trend line.
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SSEMA1-F National Debts and Government Deficits

• What is the difference between national debt and
  government deficits?
• National debt is all the money the govt owes to
  bondholders
• Govt deficits is when the govt spends more than
  it raises in revenues

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Total Public Debt
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SSEMA2 The student will explain the role and
functions of the Federal Reserve System.

• a. Describe the organization of the Federal
  Reserve System.
• b. Define monetary policy.
• c. Describe how the Federal Reserve uses the
  tools of monetary policy to promote price
  stability, full employment, and economic growth.

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SSEMA2-What is the Fed?

• The nations first true central bank
• Created in 1913
• National banks required to be member
• State banks eligible to be a member
• Privately owned Publicly operated
• Federal Reserve Notes (gold standard 1913-1934)

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a. Describe the organization of the Federal
Reserve System.

• The Federal Reserve System consists of
• Board of Governors (7 members), located in
  Washington, DC
• 12 regional Fed banks, located around the U.S.
• Federal Open Market Committee (FOMC), includes
  the Bd of Govs and presidents of some of the
  regional Fed banks The FOMC decides monetary
  policy.

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Structure of the Fed

• Board of Governors (regulatory and supervisory
  group)
• 14 year terms
• General policies
• Annual Report to Congress
• Monthly Public Bulletin

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Structure of the Fed

• 12 Districts, 25 Branches

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Structure of the Fed

• Federal Open Market Committee (FOMC)
• (the Feds primary monetary policy body)
• How does the money supply grow?
• Where are interest rates set?
• 12 voting members

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Responsibilities of the Fed

• State Member banks
• Monitor reserves
• Bank Holding Companies
• International Operations
• Foreign banks own about 20 of US banking assets
• Approx. 800 branches of US banks abroad
• Member bank mergers

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b. Define monetary policy.

• Actions by the Federal Reserve System to expand
  or contract the money supply in order to affect
  the cost and availability of goods

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c. Describe how the Federal Reserve uses the
tools of monetary policy to promote price
stability, full employment, and economic growth.
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The Feds 3 Tools of Monetary Control
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• 1. Open-Market Operations (OMOs) the purchase
  and sale of U.S. government bonds by the Fed.

• To increase money supply, (recession) Fed buys
  govt bonds, paying with new dollars.
• which are deposited in banks, increasing
  reserves
• which banks use to make loans, causing the
  money supply to expand.
• To reduce money supply, (inflationary period) Fed
  sells govt bonds, taking dollars out of
  circulation, and the process works in reverse.

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The Feds 3 Tools of Monetary Control
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• 1. Open-Market Operations (OMOs) the purchase
  and sale of U.S. government bonds by the Fed.

• OMOs are easy to conduct, and are the Feds
  monetary policy tool of choice.

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The Feds 3 Tools of Monetary Control
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• 2. Reserve Requirements (RR)affect how much
  money banks can create by making loans.

• To increase money supply, (recession) Fed reduces
  RR.
• Banks make more loans from each dollar of
  reserves, which increases money multiplier and
  money supply.
• To reduce money supply, (inflationary period) Fed
  raises RR, and the process works in reverse.
• Fed rarely uses reserve requirements to control
  money supply Frequent changes would disrupt
  banking.

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The Feds 3 Tools of Monetary Control
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• 3. The Discount Rate the interest rate on
  loans the Fed makes to banks

• When banks are running low on reserves, they may
  borrow reserves from the Fed.
• To increase money supply, (recession) Fed can
  lower discount rate, which encourages banks to
  borrow more reserves from Fed.
• Banks can then make more loans, which increases
  the money supply.
• To reduce money supply, (inflationary period) Fed
  can raise discount rate.

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The Feds 3 Tools of Monetary Control
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• 3. The Discount Rate the interest rate on
  loans the Fed makes to banks

• The Fed uses discount lending to provide extra
  liquidity when financial institutions are in
  trouble, e.g. after the Oct. 1987 stock market
  crash.
• If no crisis, Fed rarely uses discount lending
  Fed is a lender of last resort.

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Here is what a question for this standard might
look like

• The Federal Reserve wants to reduce the
• nations money supply. This could be
• accomplished by doing all of the following
• EXCEPT
• A decreasing the discount rate
• B increasing the reserve requirement
• C selling securities on the open market
• D making banks hold a reserve for all types of
  deposits

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Answer to sample question

• Decreasing the discount rate will
• encourage banks to borrow money from
• the Federal Reserve and make loans.
• This will increase the money supply, so
• choice A is the correct answer. All other
• choices reduce the nations money
• supply.

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SSEMA3 The student will explain how the
government uses fiscal policy to promote price
stability, full employment, and economic growth.

• a. Define fiscal policy.
• b. Explain the governments taxing and spending
  decisions.

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a. Define fiscal policy.

• The use of govt spending and revenue collection
  to influence the economy

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(No Transcript)
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Federal Taxation

• Revenue Spending
• Social Security
• National Defense
• Medicare
• Debt Payments
• Transportation
• Agriculture
• Education
• Health and Human Svcs

• Revenue Collections
• Individual Income Taxes
• Social Insurance Taxes
• Corporate Income Tax (revenue tax)
• Excise Taxes
• Estate and Gift Taxes
• Customs Duties
• Tariffs

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b. Explain the governments taxing and spending
decisions.
Fiscal Policy Tools
Expansionary Tools (recession) 1.Increase govt spending 2.cutting taxes
Contractionary Tools (inflationary period) 1.decreasing govt spending 2.raising taxes
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Sample Questions for Macroeconomics

• 1 What problem might policymakers be
• trying to address MOST if they increase
• funding for training programs covering
• skills such as computer repair,
• programming, and networking?
• A frictional unemployment
• B structural unemployment
• C cyclical unemployment
• D seasonal unemployment

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Answer to 1

• 1. Answer B Standard Key Economic Indicators
• The policymakers are attempting to
• address the question of matching
• employee skills to available jobs. This is
• a direct reference to structural
• unemployment.

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Question 2

• 2 Monetary policies the Federal
• Reserve can adopt include all of the
• following EXCEPT
• A raising the discount rate
• B buying government bonds
• C lowering the reserve requirement
• D raising personal income tax rates

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Answer to 2

• 2. Answer D Standard Role of the Federal
  Reserve
• Choices A, B, and C are important Federal
• Reserve monetary policies that directly affect
• the money supply. Choice D is the correct
• answer because Congress, not the Federal
• Reserve, establishes income tax rates.

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Question 3

• 3 Over a two-year period, the nation of
• Parthia experiences a steep decline in
• unemployment rate, a rise in real GDP,
• and a stabilized price level. Parthia
• appears to be
• A at the start of a recession
• B in the middle of a depression
• C stagnating economically
• D in the middle of a boom period

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Answer to 3

• 3. Answer D Standard Key Economic Indicators
• All three economic indicators are
• positive. Unemployment is down, the
• economy is growing, yet price levels
• have not moved. These good times
• translate to a boom, choice D.

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Question 4

• 4. If the unemployment rate is
• rising and the GDP is falling, the
• fiscal policy that the federal government
• should MOST likely follow is
• A decreasing taxes
• B decreasing spending
• C decreasing the money supply
• D decreasing the reserve requirement

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Answer to 4

• 4. Answer A Standard Fiscal policy and the
  federal government
• Choices C and D are monetary policies, so neither
  of
• these options is correct. Fiscal policy is a tool
  that the
• government uses to regulate the speed of the
  economy.
• When the unemployment rate is rising and the GDP
  is
• falling, the government should speed up the
• economy. Decreasing taxes, choice A, would be one
• possible way to achieve that goal. Decreasing
  spending,
• choice B, would slow down the already sluggish
  economy.