Econ Unit 6
Demand Pull inflation
"too many dollars chasing to few goods" Demand up, but supply stays the same, result: shortage with demand driving prices up over heated economy with excessive spending but same amount of goods
3 tools the FED uses
1. Changing the required reserve ratio 2. Open market Operations: purchases or sale of govt securities 3. Changing the discount rate: rate charged by the FED on its loans to commercial banks
3 macro indicators of a healthy or unhealthy economy
1. GDP 2. Inflation 3. Unemployment
Four pillars of economic growth
1. Physical capital 2.human capital 3. Technological change 4. Sound Governance
What is not included in GDP?
1. Social Security payments 2.Unpaid work (chores) 3. Some financial transactions ( sale of stocks, bonds, gold) 4. Sales of used goods (Goodwill purchases, garage sales) 5. Black market g/s
3 characteristics of money
1. acts as a medium of exchange (some acquire for the purpose of payment) 2. acts as units of account (standard measure used to set prices 3. serves as store of value (something that can be saved and will hold its value over time)
4 types of unemplyment
1.Frictional 2. Seasonal 3. Structural 4. Cyclical
GDP formula
C+I+G+(X-M) consumption by households investments by businesses govt spending exports - imports
Federal Reserve Bank
Established in 1913 because of the size of the US it has 12 branches the FED seeks to control inflation and deflation 12 federal reserve districts
Who is not part of the labor force?
Excluding those in the military, prison, mental hospitals or nursing homes
Pillar: Sound Governance
Fair legal system Fair regulatory system (OSHA, EPA, CPSC) Fair tax system (a failed tax system cannot support either above)
how is money created?
Fractional reserve banking and required reserve ratio
Four parts of the business cycle
GDP (y), TIme (x) recession (trough) expansion/recovery (peak)
components of M2
M1 and savings account and money market fund account and small time deposits (everything)
Unemployment formula
Number of unemployed people 16+actively looking for work + Number of people 16+ who are employed
Bureau of Labor and Statistics
Survey of 60,000 households Published on the 1st Friday of the Month - gives the previous months unemployment rate. Used to measure changes in the economy over time
total emplyoment
Total number of employed workers, whether they work part time or full time.*16 years old or older
total unemplyoment
Total number of workers who are actively seeking jobs but not actually working. Unemployment Rate: percentage of the labor force without a paid job
expansionary fiscal policies
Used to boost or stimulate the economy Combination of lower taxes and more government spending Increase in disposable income= increase in demand = increase in output = decrease in unemployment 2009: American Recovery and Reinvestment act
contractionary fiscal policies
Used to slow the economy down - prevent inflation Combination of tax increases and decrease in government spending Increase in taxes = decrease in disposable income= decrease in demand = increase in unemployment
fractional reserve banking
a system under which bankers keep a only a fraction of the funds they hold on deposits
Structural
arise from mismatch between job seekers and the the types of jobs available cause: mismatch of skills, geography ex: when Itunes came out CD sellers lost jobs
fiat money
began in US in 1971 backed by "good faith"
Pillar: Physical Capital
capital deepening: an increase in a country's capital per worker
cyclical
caused by an economic contraction (production measured as GDP declines) ex: recession
Pillar: Technological Change
change how goods and services are produced
CPI
consumer price index, Price of market basket/ price of market basket in a base year times 100
components of M1
currency (outside of bank) and travelers checks and all checkable deposits (3C's)
Macroeconomics
examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels
commodity money
gold
Quantity theory of money infaltion
govt prints too much money! keep printing to pay debts = hyperinflation more rich people but same amount of products result: banks refuse to lend and GDP falls
discretionary spending
govt spending that is not required by law; rather, it is authorized annually by Congress and the president
Cost Pull inflation
higher production costs up prices a negative supply shock up the most of production and forces producers to increase es: hurricane katrina
Pillar: Human Capital
increase education=increase productivity (amount of output a worker can produce in an hour)
how does the FED control the money supply
increase interest rates decreases money decrease interest rates increases money
Inflation rate
is rising general level of prices
budget surplus/deficit
is the difference between the amount of government payments and the amount of government revenues in a particular year
Real GDP
measures total production in money after taking inflation into account
Seasonal
occurs when workers lose their jobs due to seasonal change ex: construction in the winter
deflation
opposite of inflation
GDP per capita
real GDP/ total population *main indicator of a country's average standard of living connects to: life expectancy, infant mortality, literacy
Frictional
short term unemployment that occurs when workers search for the jobs best suited for their skills and interest ex: new labor force entrants, people who leave a job to find another one, people who come back (maternity)
mandatory spending
spending that is required by existing law (entitlement programs)
Full employment
the level of employment when there is no cyclical unemployment
required reserve ratio
the portion of depositors balances banks must have on hand as cash
Natural rate of unemployment
the unemployment rate in the absence of cyclical unemployment around which actual unemployment rate fluctuates
Labor force
total number of employed and unemployed workers
Nominal GDP
values each good at the dollar price actually sold for in the year in which is was produced
