Macroeconomics

Front 1

the study of the aggregate (total) effects on the national economy, of the choices made by households, firms, and government

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macroeconomics

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the market value of all final goods and services produced within a country in a given time period

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gross domestic product (GDP)

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current prices (nominal) what does it cost today?

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market value

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approach to measuring GDP; these are the things that are not included in expenditures: 1. used goods, 2. financial assets (antiques, stocks, bonds) 3. research and development

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expenditure approach

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approach to measuring GDP that adds income, wages, and taxes

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income approach

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the market value of goods and services produced by labor and property supplied by US residents regardless of where they are located

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GNP gross national product

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by how much do GDP and GNP differ?

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less than 1%

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a variable that is valued at a market/ current price and has inflation added into it

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nominal variables

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a variable that is valued in base year price and has inflation removed

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real variable

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the gross GDP of the USA is...

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14 trillion

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a period during which real GDP decreases for at least 6 months and there is negative rate of growth

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recession

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what are the 4 stages of the business cycle?

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peak, contraction, trough, expansion

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the highest level attained in real GDP recently

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peak

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period of low or negative growth

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contraction

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low point in real GDP within the business cycle

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trough

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period where real GDP is increasing during the business cycle

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expansion

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a survey from the bureau of labor statistics that is sent out to houses to calculate unemployment

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household

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a survey from the bureau of labor statistics that surveys the number of jobs created by businesses

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establishment

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total number of poeple 16+ who are not in jail, hospital, institutional care, or armed forces

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working age population

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sum of the employed and unemployed

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labor force

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if you worked at least 1 hour as a paid employee, or 15 hours in family business in the prior week

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employed

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if you are available for work and must be either 1. without work but made specific effort to find job in previous 4 weeks
2. available for work but waiting to be recalled from layoff

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unemployed

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# unemployed / labor force * 100

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unemployment rate (n)

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# labor force/ working age population

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labor force participation rate

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do not have job, are available and willing to work, but have not made any effort to look for a job in the past 4 weeks

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discouraged workers

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unemployment that arises from the time it takes to watch your skill set with the jobs that are available
- unemployment insurance (benefits) covers 50% of income for 26 weeks

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frictional unemployment

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unemployment that arise because the number of jobs available in markets is less than the number of people willing to work
- minimum wage

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structural unemployment

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unemployment that is characterized by holidays and seasons...etc.

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seasonl unemployment

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unemployment that arises due to the business cycle
-decrease with recession
-increase with boom

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cyclical unemployment

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1st, 2nd, 3rd type of unemployment
- potential GDP: fully utilizing all factors of production
- actual GDP (Y); potential GDP (y-)

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natural rate of unemployment

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when actual = potential then what happens with unemployment?

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actual unemployment= natural unemployment

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the measure of the average prices paid by urban consumers for a market basket of goods and services

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consumer price index (CPI)

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current price of market basket/ base year price of the same market basket *100

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CPI

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% change in price level from one time period to the next in the CPI; 1st derivative of CPI

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inflation rate

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CPI current year - CPI base year / CPI base year * 100

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inflation rate

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what are the functions of monetary institutions (banks)?

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1. create liquidity
2. lower the costs of borrowing and lending
3. pool risk
4. make payments

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bank that banks bank; central bank of USA; manage the US dollar; 12 regions; governing board- vote on interest rate

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federal reserve bank

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governing board for the federal reserve bank

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federal open market commitee

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these tools affect macroeconomy by changing monetary base

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federal policy tools

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amount of money in circulation in the economy

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monetary base

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% of deposits that bank must keep on hand ; hold in reserves; 12% of every dollar available at bank

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reserve requirement

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interest rate fed charges member of banks to borrow from them

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discount rate

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if you increase the discount rate, what happens to the amount of money available in circulation

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the amount of money decreases

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buying and selling of government securities by federal reserve in the open market; decisions made by FOMC; very frequently used

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open market operations

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if the open market commitee buys bonds, what are they doing to the money supply?

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increasing the money supply (monetary base)

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if the open market commitee sells bonds, what are they doing to the money supply?

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decreasing the money supply (monetary base)

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anything having to do with money; conducted by the fed

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monitary policy

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ability to produce; sustainable production and factors of production : land, labor, technology, capital, entrepreneurship

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potential GDP

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relationship between the quantity of real GDP supplied and the price level when all other influences on production remain constant

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aggregate supply

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relationship between the quantity of real GDP demanded and the price level - negatively related

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aggregate demand

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cnsumption (C) + investment (I) + good (G) + net exports (NX)

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demand (Y)

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What causes shifts in aggregate demand?

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1. expectations (optimism, pessimism)
2. fiscal and monetary policy
3. world economy

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the decision the government makes (congress and administration) regarding taxes and government spending

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fiscal policy

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determine deficit, surplus, and balance

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federal budget

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when tax revenue is less than government spending for one fiscal year

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deficit

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when tax revenue is greater than government spending for one fiscal year

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surplus

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when tax revenue is equal to government spending for one fiscal year

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balance

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sum of all deficits and surpluses over time; 9 trillion in US

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federal debt

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fiscal action (by congress) that is initiated by an act of congress ex. farm bill, rebate checks

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discretionary spending

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spending that is triggered by the state of the economy; requires no direct policy action

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automatic spending

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government spending in taxation to improve performance of macroeconomy

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stabilization policy

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increasing government spending or decreasing taxation because they expand real GDP --> increasing demand; use during recessionary gap

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expansionary

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decreasing government spending or increasing taxation --> decreasing real GDP; use during inflationary gap

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contractionary