C.2 Economics, Skill #4- Notes

C.2 Economics, Skill #4- Notes

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

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

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

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

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 

Monetary Policy Summary Table