Econ Unit 6

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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


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