Macroeconomics: Policies

1
Unit 4

• Macroeconomics Policies
• Ch 13 Economic Performance
• Ch 14 Economic Instability
• Ch 15 The Fed and Monetary Policy
• Ch 16 Achieving Economic Stability

2
Ch 13 Economic Performance

• GDP (Gross Domestic Product)

• The ___________ of all final goods services
  produced w/in a countrys borders in a year.
  USED TO ___________________________.
• Its the most important measure of an economys
  _________________.
• _______ 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)

3

• Economic sectors (Different parts of the economy)

• _______________ sector individuals/families
• ___________ sector
• Represented by a C
• _________ sector businesses (including sole
  proprietorships, partnerships corporations)
• Its 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)

4

• How do we determine GDP?

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

5

• GNP (Gross National Product)

• The dollar amount of all final goods services
  produced w/ labor property supplied by a
  countrys ___________. USED TO MEASURE
  ____________.
• Usually very close to a nations GDP.
• ________ goods services produced w/ labor
  property supplied by ___________ in the US.
• End Section 1

6

• 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
  __________.

7

• 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

8

• 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 arent ________ 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
  __________.

9

• 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
  65100)
• __________
• ________

End Section 3
10

• 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 ____________.

11

• 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 populations
  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
12
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.

13
or Recession
14

• 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
  theyve 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).

15

• 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 werent 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).
• Couldnt pay off loans weakened ________ .

16

• 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.

17

• 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 couldnt
  pay their mortgage.
• By 1933, ¼ of American workers were
  ________________.
• This prolonged business slump was The Great
  Depression.

18

• 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 didnt end until __________.
• End Section 1

Collapse of World Trade Following Smoot-Hawley
Tariff of 1930
19

• 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
• It doesnt count those who are too
  _______________ to look for work.
• It doesnt count those who are working _______
  even if they wish to gain full-time employment.

20

• 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

21

• 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.

22

• 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 ______________.

23

• 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.ts
  ________________ (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
  __________________.

24

• 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

25

• 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

26

• 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

27
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 _________________

28

• Structure of the Fed
• Ben Bernanke
• Chairman of the Fed

• Its 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).

29

• 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

30

• Other services

• ___________________
• The District Federal Reserve System Bank takes
  from the account of the person whos written the
  check transferring it into the bank of the
  person whos 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.ts bank ex.
  maintains accounts for the IRS.
• End Section 1

31

• 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.

32

• 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.

33

• 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).

34

• 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).

35

• Moral suasion

• The use of _____________ (such as announcements,
  press releases, articles, ____________ before
  Congress).
• A ______ monetary policy tool of the Feds.
• 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

36

• 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 its 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 theyll have less to spend in
  the future. Also, expectations of future ______
  lead to people spending more now.
• End Section 3

37
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

38

• 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 countrys 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

39

• Achieving economic stability demand-side policies

• Federal policies designed to or total
  __________ in the economy.
• Fiscal policy the gov.ts 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.

40

• 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.ts 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.

41

• 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

42

• Fiscal policy

• (The gov.ts 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).

43

• 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