Economics Unit 3 (Macroeconomics)

During a recession, the economy shrinks causing:

- Decreasing levels of production. - Loss of jobs. - Increasing sense of pessimism.

The categories included in M1 are:

- Demand Accounts - Cash and Currency in Circulation

What are some things to know about the Federal Reserve?

- Established in 1913. - Oversees twelve regional banks. - Transfers any profits made to the US Treasury.

What are the 4 phases of business cycle?

- Expansion - Peak - Contraction -Trough

International trade helps economies grow while it also:

- Gives nations more ways to sell their products and services. - Allows nations to draw on more sources of labor and raw materials.

Investment Banking

- Helping companies and individuals buy and sell securities. - Assisting companies in major business transactions, such as when one company purchases another.

Investors

- Investors can earn profits. - Profits can be spent.

The business cycle affects everybody because:

- It would be easier to get a job during expansion. - It could be a good idea to buy investments such as stocks during a recession when prices tend to be lower. - Clothing and food prices will tend to rise during a recovery. - It is often undesirable to sell a house during recession. When demand for homes is lower.

Investors and banks also invest in equity in other ways like:

- Making agreements to buy securities in the future at set prices. - Swapping ownership of equity.

What were some bad effects of The Great Depression?

- Many businesses failed. - Wages fell.

By examining certain economic indicators, you get help in

- Measuring how much the economy can produce. (through looking at the nations GDP or Gross Domestic Product) - Tracking how much of the labor force is employed. (by looking at the Unemployment rate)

Banks 3 main roles are:

- Storing and holding money. - Lending money. - Investing in the economy.

The Economy

- The economy benefits as new jobs are created and new profits are spent.

Higher rates of inflation influence the economy in a negative way by the way that:

- They increase uncertainty. - Real incomes fall. - Banks grant fewer loans. - Interest rates rise, so the cost of borrowing is higher.

Capital Appreciation

- When a stock rises in price, an investor can sell it and make a profit.

Retail Banking

- Working directly with consumers and small businesses. - Offering accounts for daily use. - Offering loans and investment opportunities.

Commercial Banking

- Working mostly with large businesses and corporations. - Offering accounts for daily use. - Offering loans for capital purchases.

Depression is characterized by:

- a decline in GDP over a long period of time.(at least 4 consecutive quarters.) - high unemployment. - an increase in the number of failed businesses. - a sustained drop in sales and the standard of living.

A recovery is marked by:

- an increase in GDP. - increased production. - improved feelings about the economy.

With higher interest rates:

- consumers are discouraged from borrowing. - the less consumers borrow, the fewer injections enter the economy. - consumers are more likely to invest.

With lower interest rates:

- consumers borrow more money. - the more consumers borrow, the more injections enter the economy. - consumers are less likely to invest.

A central bank's functions include:

- creating policies within the economic system. - managing a nation's currency and money supply. - serving as the bank for banks. - regulating and supervising the banking industry.

M1 includes:

- currency in circulation. - money deposited in "demand accounts" with banks, like checking accounts.

Stagflation occurs when an economy is experiencing:

- damaging rates of cost-push inflation. - declining production of goods and services. - a high level of unemployment.

Every currency:

- has a value. - has denominations. - is divisible.

Economic models can help us:

- identify patterns. - predict changes.

Banks allow consumers and producers to store money and assets. They both hold:

- money in accounts. - investments.

Companies issue stock to:

- raise new capital. - pay off debt.

Stagflation is a serious challenge that can have major consequences for the economy, including:

- reducing the value of currency. - decreasing production and real GDP. - decreasing trade with other economies.

Customers can gain interest through accounts like:

- savings accounts. - certificates of deposit (CDs).

M2 includes M1 and money in other accounts, such as:

- savings accounts. - investment accounts.

During a period of expansion, there are:

- sustained increases in real GDP. - high levels of production. - rising prices and wages. - good feelings about the economy.

Macroeconomics studies supply and demand in the aggregate, which means:

- the total amount of supply. - the total amount of demand.

Individuals in an economy suffering from stagflation:

- worry about becoming unemployed, causing less spending. - worry about inflation, causing more spending. - spend less money, causing an economic slowdown.

The higher the risk, the greater the

interest rate that is charged.

To help encourage economic growth, a country can

invest in research and development.

The Federal Reserve manages the nation's currency and money supply by

manipulating interest rates and acting as a lender to banks.

The higher the interest rate, the more

money the bank makes when the loan is repaid.

Profits are

not guaranteed.

Economic growth takes place when a country

produces more goods and services.

Banks pay interest to customers through a

savings account.

Exchange rates can indicate economic health by

showing the relative strength of different nations' currencies.

To invest is to

spend money with the goal of making a future profit.

The Federal Reserve transfers profits from its twelve regional banks to

the Department of the Treasury.

Macroeconomics is the study of the economic interactions of larger groups, such as:

- National economies. - Regional economies. - International Organizations.

Examples of leakage factors include:

- Savings. - Taxes. - Imports.

Economic growth is limited by lack of capacity because of:

- Shortage of workers with the right skills. - Lack of infrastructure or technology. - Lack of industrial capacity

Supply

- Supply is the amount of a good or service that a producer provides to a consumers. - Quantity supplied is affected by price and production cost.

Studying macroeconomics helps people understand, predict, and anticipate:

- economic actions taken by the government. - political debates regarding government actions. - major economic events, such as periods of high unemployment or inflation.

Economic Models can:

- identify patterns. - predict changes.

The circular flow model demonstrates interactions within the economy, including:

- interactions between households and firms. - interactions between different sectors of the economy.

Macroeconomics studies the challenges that entire economies face, such as:

- keeping workers employed. - keeping prices stable.

Things that impact demand are:

- number of consumers. - price of related goods. - disposable income. - taste. - preferences. - expectations.

Things that impact supply are:

- the number of sellers. - import cost. - government action. - technology - price of related goods. - expectations.

What does gross national product (GNP) include?

Domestically owned businesses outside a country.

Sector

A subdivision within an economy.

Aggregate

A total amount.

What is also known as total output?

Aggregate Supply

What reacts very specifically to economic changes?

Aggregate Supply

The 4 key areas of macroeconomics study include:

Economic Indicators Economic Challenges Money Economic Models

What can measuring unemployment help us understand?

Economic output.

When does structural unemployment cause?

An individual's skills to become outdated.

What does international trade help?

Economies grow.

Indicators

Data used to evaluate the current and future health of an economy.

What does microeconomics focus on?

Direct interactions between producers and consumers.

In microeconomics, the point at which supply and demand meet is called the ________________________ price.

Equilibrium

Factors of production also include:

Factor Market Income

In the circular flow model what do the households provide to the firms?

Factors of Production

What are the 3 sectors included in the circular flow models demonstrated interactions?

Financial Sector Government Sector Foreign Sector

What does decreased demand for goods and services result in?

Firms producing less.

What does gross national product (GNP) exclude?

Foreign-owned businesses inside a country.

In the circular flow model what do the firms provide to the households?

Goods and Services

Offset

Something that balances or makes up for something else.

What are producers willing to do?

Supply a good for a specific price.

In macroeconomics, to study the aggregate means to study

total supply and demand.

What can a country do in order to help encourage growth and offset problems?

A country can invest in its resources.

What does GDP per capita measure?

A nation's GDP per person.

When economic productivity is high then the cyclical unemployment rate will be what?

Low

What is economic growth measured by?

(GDP) Gross Domestic Product

Demand

- Demand is the amount of a good or service that consumers are willing and able to purchase. - Quantity demanded is affected by price and the need for the good.

Which statement best describes why a government's actions are important in macroeconomics? Check all that apply.

- Government controls industry through policy. - Government is both a consumer and a producer. - Government can use policy to influence the economy.

What are some questions to ask when dealing with macroeconomics studies on how money functions within the economy?

- How is money used? - How does an economy as a unit make money? - How do governments use money to influence economic activity?

The main goals of macroeconomics are to study:

- How the economy is behaving. - Which factors are causing the economy to grow or shrink.

Examples of Injector Factors include:

- Investment spending - Government spending - Consumer spending - Net exports

Economic growth is limited by low demand because of:

- Low demand for a nation's exports. - Low domestic demand. - Inability of citizens to purchase goods.

When does increased unemployment happen?

As output decreases, lowering the GDP.

GDP per capita determined by?

By dividing the total GDP by the number of citizens.

How can economists measure the health of an economy?

By examining certain economic indicators.

The use of technology helps economies to do what?

Helps economies to grow and compete internationally.

When economic productivity is low then the cyclical unemployment rate will be what?

High

Growth

Increase or enlargement.

Economic interactions involving which of the following would most likely be studied in macroeconomics?

International Monetary Fund policy

Aggregate Demand

Is the total demand for all goods and services in an economy.

In a shrinking economy what is their less of?

Less Hiring

Aggregate supply can change as a result of what?

Many factors, such as changes in corporate taxes, regulations, and technology.

What does gross national product (GNP) measure?

Measures the output of a nation's citizens.

The interaction of supply and demand between individual producers and consumers is studied within

Microeconomics

Which best describes the purpose served by economic models within an economic system?

Models identify patterns.

In a growing economy what is their more of?

More hiring

Per Capita

Per person.

Goods and services also include:

Product Market Expenditures

What do leakage factors do?

Pull money out of an economic system.

What are consumers willing and able to do?

Purchase the good at the same price.

In microeconomics, price helps determine both quantity supplied and quantity demanded. Which other factors can impact each by causing a shift to occur?

Quantity supplied is determined by production costs, and quantity demanded is determined by desire for the product.

Shrinking Economy

Real GDP declining (negative growth rate) - Unemployment rising.

Growing Economy

Real GDP rising (positive growth rate) - Unemployment falling.

What does having new technology mean?

That a country can produce high-tech products.

The aim of the study of macroeconomics is to examine

The behavior of factors affecting the economy.

When real GDP increases, what is the economy doing?

The economy is growing.

When real GDP decreases, what is the economy doing?

The economy is shrinking.

Which best describes what occurs in the product market?

The exchange of goods and services for money.

Output

The goods and services produced by an economy.

When does structural unemployment occur with?

The introduction of new technology.

Why are imports, which bring goods into a country, considered a leakage factor?

The money paid to producers of imports leaves the country.

What does GDP measure?

The output of a given economy in a year.

What does the GDP per capita help compare?

The performance of nations.

What do economists create models to do?

Understand how the economy works.

What happens when more jobs are created?

Unemployment declines and output increases.

What is the formula for unemployment rate?

Unemployment rate equals unemployed workers divided by Number of workers in the labor force.

What does declining production cause?

Unemployment to rise.

What are injector factors?

Ways that different sectors bring money into an economic system.

When does equilibrium occur?

When a society is using its resources efficiently.

When is macroeconomic equilibrium achieved?

When aggregate supply and aggregate demand meet.

When does economic growth occur?

When an economy is able to produce more goods and services.

When does unemployment occur?

When an individual is actively looking for a job but is unable to find work.

When are prices set?

When interactions between producers and consumers reach equilibrium.

When does frictional unemployment occur?

When workers are unemployed by choice.

Investors also purchase debt in other ways by:

- Buying the rights to consumer loans. - Buying the rights to mortgages.

Different Types of Markets include:

- Commodities Markets - Securities Markets - Bond Markets - Stock Markets

3 Major Types of Money include:

- Commodity Money - Representative Money - Fiat Money

Major Types of Investments are:

- Debt - Equity

What does each nation's currency have?

A changing value relative to other currencies.

Interest

A charge or fee in exchange for borrowing money.

What does money allow us to determine?

A clear value for goods and services.

Recession

A decline in the business cycle, when people produce and spend less.

What is cyclical unemployment caused by?

A decrease in demand in the economy.

What is known as a serious economic crisis?

A depression.

What can falling investment indicate?

A drop in aggregate demand.

What is interest?

A fee in exchange for borrowing money.

What is a bank?

A financial institution that stores and lends money.

What is inflation?

A general increase in the overall price level in an economy.

Stagflation

A gradual, steady increase in prices combined with unemployment and low consumer demand.

Inflation

A gradual, steady increase in the prices of goods and services.

Loan

A granting of money for temporary use.

What is demand-pull inflation usually a sign of?

A healthy economy.

Business Cycle

A model of economic change that shows a pattern of growth and decline.

What is the business cycle?

A model that shows how the economy expands and contracts.

What is a market?

A place where financial assets can be traded.

What does money allow citizens to have?

A portable measure of value.

What is a recession?

A recession is a contraction in which there are back-to-back quarters of declining GDP.

What are stocks?

A share of ownership in a corporation..

Consumer Price Index

A statistic that shows the average change in prices over a period of time hyperinflation - an exponential rise in prices of goods.

What is a currency?

A system of money that can be created by a nation or region.

Barter

A system relying on trade as opposed to money.

What is liquidity?

A term that explains how quickly money can be exchanged.

Depression

A time when the economy is very poor and there is a high rate of unemployment.

Money

A type of currency with value that is used to exchange for goods and services.

Which of these scenarios involves commodity money?

A woman offers her neighbor a US silver dollar in exchange for a bicycle.

Real Measurements

Account for inflation and price changes.

The period of expansion following the trough is often called what?

An Economic Recovery

Hyperinflation

An exponential rise in prices of goods.

What does demand-pull inflation generally result in?

An increase in production to keep up with demand.

Bank

An institution that stores and loans capital.

What is money?

An item with a designated value that can be used to pay for goods and services.

Debt

An obligation to pay something.

Recovery

An upturn in the business cycle, when people produce and spend more.

When does demand-pull inflation occur?

As demand steadily increases.

How do banks inject money into the economy?

Through loans.

Influence

To encourage something to happen or change.

Default

To fail to pay off a loan.

Regulate

To govern by providing guides and limitations.

Why must the nation's money supply be monitored?

To make sure that the right amount of money exists.

Govern

To manage and rule over something.

Invest

To spend money or time on an asset with the hopes that it will increase in value over time.

Why must banks make a profit?

To stay in business.

Exchange

To trade goods and services.

Why do we need to understand cause and effect?

To understand influences on the business cycle.

What do economists use models for?

To understand trends in macroeconomics.

The benefits of loaning money is that it:

- Allows consumers to buy expensive items like automobiles and homes. - Allows entrepreneurs to start their own businesses. - Allows businesses to improve and expand.

The importance of holding or depositing money is that it:

- Allows consumers to save or withdraw money at any time. - Allows consumers to protect their money from theft. - Allows banks to use that money to earn a profit through loans and investments.

Bonds

- Are issued by governments and privately owned companies. - Are similar to a loan that the issuer must honor. - Pay a specific amount if held until they mature.

In what ways does the central bank govern the banking industry?

- Audit banks to ensure they are following the law. - Determine how much cash banks must keep in reserve. - Respond to banking crisis. - Oversee a nation's payment system.

What are some of the dangers of loaning money?

- Banks may have less money to loan to others. - Widespread defaults may cause an economic downturn.

Investing Money:

- Benefits the bank's shareholders, who share in profits. - Benefits companies that are able to raise capital to expand and make improvements. - Benefits the economy as money moves from one party to another.

Businesses and Governments

- Businesses and governments can receive financial capital to use to grow.

How does the stock market work?

1. Companies put stock up for sale. 2. Investors buy and sell stock. 3. Prices are set by supply and demand. 4. Stock prices increase or decrease depending on the market, the health of the company, and the economy

The way you can invest is to

1. Make an initial investment by spending money. 2. Allow the investment to mature over time 3. Collect a profit on the return.

What are the three steps in which you can follow in order to invest in debt?

1. Offer a loan or buy the rights to debt. 2. Allow interest to be paid over time. 3. Collect the principle with interest earned.

What are the three steps in which you can follow in order to invest in equity?

1. Purchase a valuable asset. 2. Allow the value of the asset to increase over time. 3. Sell the asset for a profit.

These are the four stages of the business cycle: 1. Depression 2. Prosperity 3. Recession 4. Recovery In which order do these stages occur?

2, 3, 1, 4

There are five stages in a recession. 1. job loss 2. falling production 3. falling demand (occurs twice) 4. peak production In which order do these stages occur?

4, 3, 2, 1, 3

Bond

A certificate that is purchased and then sold back later for a specified higher price.

US Government Securities

Backed by the full faith and credit of the US government.

What does money replace the need to do?

Barter

Why does representative money have value?

Because it can be exchanged for a valuable good.

Why does commodity money have a value?

Because it is made with a valuable object.

Why can fiat money change in value?

Because of government regulations.

Why does demand-pull inflation occur?

Because of increasing demand (prices increase with demand).

How does fiat money have its value guaranteed?

By a government.

How can consumers and investors invest?

By buying equity to sell later.

During a recession, what is one way governments try to encourage growth?

By increasing unemployment benefits.

In what two ways do investors try to earn money through stocks?

Capital Appreciation Dividends

Which scenario best reflects the relationship between production and demand in a recession?

Car dealerships cannot sell their stock.

What is is the most liquid form of money?

Cash

What governs the banking industry?

Central Banks

The government responds to the business cycle by doing what?

Changing its policies.

What was the most common form of money called in the past?

Commodity Money

Dividends

Companies distribute some of their earnings to shareholders.

What can defaulting on loans have for the economy?

Consequences

What does representative money allow?

Currency to be traded for a commodity such as gold or silver.

Who do banks pay interest to?

Customers who store their money in the bank.

What can consumers and businesses invest in?

Debt

What are bonds?

Debt certificates that are purchased by an investor.

Which statement best describes why it is difficult to sell a home during a recession?

Demand greatly decreases.

What are the three main types inflation?

Demand-Pull Inflation Cost-Push Inflation Hyperinflation

What are exceptionally long contractions referred to as?

Depressions

What do inflation and price indexes allow us to do?

Develop a clearer understanding of changes in the economy.

What do different types of investments offer?

Different rates of return.

Nominal Measurements

Do not account for outside factors.

Which best describes the nature of cause and effect in the context of the business cycle?

Each effect has other effects.

By the bank gaining interest on repaid loans, what does it help the bank do?

Earn a profit.

What can rising investment indicate?

Economic growth.

The condition of a country's ____________________ depends on its people's ability to exchange money for goods and services.

Economy

When the government prints more money what does it result in?

Even faster inflation.

Fiat money has a value that is influenced by what?

Exchange rates.

What does deflation usually accompany?

Falling demand and economic problems.

What is deflation characterized by?

Falling prices.

Banks have many functions that do what?

Fulfill different needs within an economic system.

What does commodity money often include?

Gold or Silver.

What can technology help a nation create?

Goods that are in demand around the world.

Which body or group is most able to use money to influence the economy?

Government

Which of the following is a characteristic of the prosperity phase of the business cycle?

High levels of production.

High Risk

High return Low Liquid

In addition to loaning money, why do banks invest money?

In order to make a profit.

Where are shares of stocks traded?

In stock exchanges in countries and cities around the world.

What is cost-push inflation caused by?

Increased production costs.

What do economists study?

Indicators that reveal how production and demand are changing.

What does rising prices cause?

Inflation over time.

Which best explains why banks consider interest on loans to be important?

Interest helps them cover business costs.

Corporate Bonds

Issued by private corporations.

Municipal Bonds

Issued by states, counties, and municipalities.

How is using money related to bartering?

It is a substitute for bartering.

Low Risk

Low return High Liquid

What is the most liquid category of money?

M1

Which best describes what is represented in the business cycle model?

Macroeconomic Trends

What are central bank responsible for?

Managing banking activity.

What can become worthless due to hyperinflation?

Money

What does inflation cause?

Money to lose its value over time.

Can money in accounts take more or less time to exchange?

More

Stock

Partial ownership of a corporation.

Income reaches the highest level at the _________________ point of the business cycle.

Peak

What is the highest point of expansion called?

Peak

Who do banks allow to store money and assets?

Producers and Consumers

What are recessions driven by?

Production and Demand

What does inflation reduce?

Purchasing power for individuals.

What is a prolonged contraction called?

Recession

What do we have when GDP begins to rise again?

Recovery

Banks gain interest on what?

Repaid loans.

What is inflation characterized by?

Rising prices for goods and services.

During a recession, what does the government do?

Stimulates demand and encourages growth.

Which are the roles of a bank? Check all that apply.

Storing and holding money Lending money Investing in the economy

What systems was representative money used in?

Systems involving a "gold standard" or "silver standard."

What is the most common measure of inflation called?

The Consumer Price Index (CPI)

What is the central bank of the United States called?

The Federal Reserve.

What was the worst economic crisis in US history called?

The Great Depression

What is consumer price index calculated by?

The Us Bureau of Labor Statistics.

Liquidity

The ability to quickly convert to cash.

What is bartering?

The act of exchanging goods or services of equal value.

What is a nation's money supply?

The amount of money available in the economy.

What is inflation rate?

The annual rate at which prices increase.

Who does the bank deposits benefit?

The bank, consumers, and businesses.

What do interest rates affect?

The behavior of borrowers and investors.

Currency's exchange rate refers to what?

The changing value relative to other currencies in each nation's currency.

Circulation

The circular movement of currency, cash money, within an economic system.

Production

The creation of goods and services in an economy.

What do higher rates of inflation influence?

The economy in a negative way.

What happens during a recession?

The economy shrinks.

Currency

The form of money, such as paper bills or coins, within a financial or economic system.

Equity

The monetary value of a property or business.

Return

The money earned on an investment in a certain time period.

Peak

The peak refers to the point at which GDP for the cycle has reached its maximum and that economy begins to contract.

What is risk?

The possibility of the investor loosing some or all of an investment.

What does the consumer price index collect?

The prices of goods in a market basket, which includes many commonly purchased items.

Unemployment

The situation of not having a paid job, or the number of workers without jobs.

A long-run equilibrium occurs when long-run aggregate supply and aggregate demand meet. What does having long-run equilibrium indicate about a society?

The society is using all of its resources efficiently.

Macroeconomics

The study of economics with a focus on large groups or units, such as nations.

Aggregate Supply

The total supply of all goods and services produced in an economy at various price levels.

What is gross domestic product (GDP)?

The total value of all final goods and services produced in a country in a given year.

Gross Domestic Product

The value of all goods and services produced during a specific period of time.

Who do banks return profits to?

Their investors and stockholders.

What is the lowest point of contraction called?

Trough

What is one problem that might commonly occur when one is bartering?

Two people have different ideas about the value of an item.

What are the common types of bonds called?

US Government Securities Municipal Bonds Corporate Bonds

How is market performance tracked?

Using stock indexes.

What does money allow us to exchange?

Value for goods and services.

What does money allow us to easily store?

Value that we have earned.

When do banks balance risks and return?

When making a loan.

When might it be important to know a currency's exchange rate?

When planning expenses for an overseas trip.

When does hyperinflation occur?

When prices rise extremely quickly.

When does deflation occur?

When the general price level steadily decreases.

When does frictional unemployment also occur?

When workers and employers are seeking a better fit.

When does structural unemployment occur?

When workers are unemployed because the makeup of the economy is changing.

What do indexes use formulas to calculate?

Whether prices are rising or falling overall.

What can the level of investment in markets indicate?

Whether the economy is growing or shrinking.

Where does frictional unemployment exist?

Within an economy.

Can cause and effects be diagrammed?

Yes

Can money hold value in different ways?

Yes

Do producers need time to respond to economic changes?

Yes

During the Great Depression did the economy improve over time?

Yes

A currency is a system of money created and used by

a nation or region of the world.

An entrepreneur who needs large amounts of capital to create and distribute a new invention would most likely visit

an investment banker.

Investors can purchase securities, which are

assets that can be bought and sold.

How do central banks govern the banking industry?

by deciding how much banks must keep in reserve by overseeing the nation's payment system by responding quickly to banking crises that occur by auditing banks based on current regulations

The Federal Reserve Bank of the United States is also known as the

central bank.

When economists determine that a nation's GDP has declined, they can point to this as a sign of

economic shrinkage.

Economists use gross national product (GNP) to measure

the output of a nation's citizens, regardless of where they are.

To barter is to

trade.

To barter means to

trade.

Investments may go

up or down in value.