Unit IV Study Guide

Question 1

Macroeconomics study?

Answer 1

Entire economy – aka the big stuff

Question 2

Concepts does it study?

Answer 2

Economic output
Unemployment
Inflation
Interest rates
Government policy

Question 3

3. Macroeconomics born?

Answer 3

Great Depression – 1930s

4. Macroeconomists make claims based on data, theories, and historical trends. However, these claims are just predictions

Question 4

5. What are the 3 Economic Goals?

Answer 4

Keep economy growing
Limit unemployment
Keep prices stable

Question 5

Measurements?
Growth of economy?
Jobs?
Stable Prices?
Most important?

Answer 5

GDP

Unemployment rate

Inflation rate

GDP

Question 6

GDP

Definition:

Answer 6

All final goods and services produced within a country during a specific period of time (usually one year).

Question 7

10. What does GDP not include?

Answer 7

Buying secondhand product (used good)
Buying stocks
Company buys another company
Non-traditional
Such as household productivity
i.e. Mr. D fixing his truck
Bartering goods & services
Illegal activity

Question 8

11. GDP is measured in US dollars, what can askew the measurement?

Answer 8

Inflation

12. Which measurement accounts for inflation?
    Real GDP
13. What often misused term refers to two successive quarters (i.e. 6 months) in which real GDP declines?
    Recession
14. What term does not have a technical definition, but it ultimately refers to a severe recession?
    Depression

Question 9

Unemployment Rate

Answer 9

Definition: Number of people unemployed divided by the number of people in the labor force, times 100.

17. What two qualifications must exist to be considered unemployed?
    Actively looking for a job, but can’t find it
    Legal working age
18. What groups are not counted as unemployed?
    People unable to work
    Little kids, sick or disability
    Choose not to work
    Retired people
    Illegal jobs
19. Person looking for a job, but they give up?
    Discouraged worker
20. Not accounted = unemployment rate?
    Underemployed
    Works 5 hours week, wants a better job with more hours = labor force
21. Hence, the official unemployment rate underestimates problems in the labor market.
    Like GDP, not perfect but it’s what we have

Question 10

Questions 21 & 22 (Types of Unemployed)

Answer 10

21. People are temporarily unemployed?
    Frictional
    Someone quit their job & is looking for a new one
22. Workers are out of work because there is no demand for their specific type of labor?
    Structural
    Workers replaced by machine

Question 11

23. Worst type of unemployment?

Answer 11

23. Worst type of unemployment?
    Cyclical
    Cause?
    Recession
24. Relationship between GDP & the unemployment rate?
    Inverse
    1 goes ↑, the other goes ↓

Question 12

26. What is the term for when prices go up?

Answer 12

26. What is the term for when prices go up?
    Inflation
27. What is the term for when prices go down?
    Deflation
28. What is deflation bad?
    Discourage people from spending
    Expect prices will fall more = hence spend less

Question 13

29. what does the business cycle refer to?

Answer 13

Economy expands & contracts
Booms & Busts

Question 14

If GDP expands…

Answer 14

Unemployment ↓
Factories produce @ full capacity

Problems…
Resources are finite
People outbid each other
Inflation
Production cost ↑
Workers demand higher wages

Question 15

Economy begins to slow…

Answer 15

Firms lay off workers
Unemployed people spend less money
Firms lay off more people
Economy begins to contract
30. What are the 4 components of GDP?
Consumer spending
Business spending
Govt. spending
Net exports
Spending by other countries

Question 16

31. What does the US economy rely on & how much?

Answer 16

Consumer spending – 70%

What does China rely on?
Exports
32. If there is a recession, what do some feel the government should do?
Increase Govt spending &/or cut taxes

33. What is the drawback?
    Debt

Question 17

What Is Macro All About?

Answer 17

Macroeconomics looks at the economy through a wide lens

Macroeconomics uses a variety of models to create government policies

Macroeconomics is all about understanding the consequences of decisions

Macroeconomics is all about making large, overarching decisions

Contemporary macroeconomics is all about understanding and strategically manipulating the economy to produce the best results.

Question 18

Fiscal Policy refer to…

Answer 18

use of government spending and tax policies to influence economic conditions

Question 19

During a recession govt should…

Answer 19

lower tax rates or increase spending
Why?
Encourage demand & spur economic activity

Question 20

To combat inflation…

Answer 20

Govt – raise rates or cut spending
Why?
To cool down the economy

Question 21

Fiscal policy

Answer 21

Elected government officials try to influence economy

Question 22

Monetary policy

Answer 22

Central bankers try to influence economy

Question 23

Who created the idea of fiscal policy?

Answer 23

John Maynard Keynes

What did he argue that governments could do?
Govt could stabilize the business cycle

Question 24

What event was the father of Macro reacting to?

Answer 24

Great Depression

How did he impact the US and describe what it did?
New Deal
Massive spending on public works projects & social welfare programs

Question 25

When is it used? fiscal expansionary policy

Answer 25

Recession What are the tools or methods (2) Lowering taxes Increasing Govt spending  What is the negative impact? Debt

Question 26

When is it used? contractionary

Answer 26

Mounting inflation What are the tools or methods (3-4) Increase taxes Reducing public spending Cut public sector pay or jobs What is the negative impact?  Politically unpopular

Question 27

Types of Monetary Policy - contractionary

Answer 27

Contractionary Why? decrease inflation Tool? Increase interest rates Impact? Limits the outstanding money supply to slow growth

Question 27

What strategies do they employ to keep the economy healthy? monetary

Answer 27

Revising interest rates & changing bank reserve requirements What are the Federal Reserve’s 2 goals (mandates)? Maximum employment Keep inflation in check

Question 28

Who uses the monetary policy?

Answer 28

Central bank What does monetary policy control? Overall money supply What does the monetary policy promote? Economic growth

Question 29

Expansionary - monetary policy

Answer 29

When? During recession Tool? Lowering interest rates Impact? Saving becomes less attractive Consumer spending & borrowing increase

Question 30

3 tools that the Fed uses? Tools of Monetary Policy

Answer 30

Open Market Operations (OMO) Discount Rate Reserve Requirements

Question 31

Open Market Operations (OMO): Tools of Monetary Policy

Answer 31

Fed Buys bonds from investors or sells bonds to investors Why? Change the number of outstanding government securities & money available to the economy as a whole Why? Manipulate the short-term interest rates 

Question 32

Tools of Monetary Policy - Discount Rate:

Answer 32

Central bank may change the interest rates  Why? Banks will loan more or less freely depending on this interest rate Reserve Requirements: Banks must have a proportion of the deposits in house Impact if Fed changes requirements? Lowering this requirement releases more capital for the banks to offer loans or buy other assets Increasing the requirement curtails bank lending & slows growth

Question 33

John Maynard Keynes

Answer 33

Wrote: “The General Theory of Employment, Interest, and Money” Main ideas? Govt should regulate the economy Well-functioning & flourishing economy Combo private & govt sectors

Question 34

Keynes v Adam Smith

Answer 34

Keynes against free-market economics Why? Classical economists (invisible hand) = downturn good thing Entrepreneurs - incentive to take over the market & generate growth Interest rates are high for investors Keynes argued... Downturn bad Decrease in wages & problem worse Keep inflation low Benefit BOTH the producer & the consumer

Question 35

Keynesian Economics in Today’s World

Answer 35

Recession Govt should fight it Stimulus package ↑ spending & income Ergo… Spending & not saving is the key to economic health However… Spending, employment, & prices Historically slow to catch up with economic conditions Hence govt needs to figure out ways to do this Aka = Monetarism

Question 36

Monetarism

Answer 36

Tool → stimulate an economy How? Flushing a society w/ money to promote spending How do you get money into the system? Lowering interest rates Consumers → make big purchases & get money flowing in an economy Goal of lowering interest rates… Generate a short-term change in demand So cash flow & employment rates ↑ If lowering interest rates fails to work Govt → step in (aka fiscal policies)

Question 37

Aggregate Demand:

Answer 37

Total demand

Question 38

Aggregate Supply:

Answer 38

Total Supply Classical economic thinking: Adam Smith’s ideas of free-market economics

Question 39

Full Employment:

Answer 39

an economic situation in which all available labor resources are being used in the most efficient way possible.

Question 40

Economic stimulus:

Answer 40

action by the government to encourage private sector economic activity.

Question 41

Monetarism:

Answer 41

a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.

Question 42

Interest rates:

Answer 42

the amount a lender charges a borrower and is a percentage of the principal—the amount loaned.

Question 43

Unemployment Definition:

Answer 43

Workers actively looking but unable to find employment 1 of the most important economic indicators NOT Perfect

Question 44

Who is NOT included?

Answer 44

People unable to work i.e. Little kids, sick or disability Choose not to work i.e. Retired people, higher education Illegal jobs

Question 45

High rates of unemployment:

Answer 45

Obviously bad Why? What does it signal about the economy? Distress

Question 46

Low rate of unemployment:

Answer 46

Obviously good Why? Economy is producing at full capacity, maximizing output, driving wage growth, & raising living standards

Question 47

So, are extremely low rates of unemployment good?

Answer 47

Not necessarily May signal an overheated economy, inflation, no more room to hire

Question 48

Most experts – Ideal unemployment rate

Answer 48

Between 3% to 5% No single consensus Many Govts offer unemployment insurance Unemployed individuals a small amount of income Certain requirements

Question 49

4 Types of Unemployment

Answer 49

Frictional Structural Seasonal Cyclical

Question 50

Frictional When does it occur? Who contributes? Other causes?

Answer 50

Voluntary employment transitions within an economy When does it occur? Growing & stable economy Who contributes? Workers moving from job to job New workers entering the workforce Other causes? People deciding to prioritize taking care of their family, returning to school, or finding purpose in life Sign = economy is doing well Seen as a choice People are unemployed because… Just finish school Looking for a new job to better themselves &/or find fulfilment Note: Frictional unemployment can be a positive sign that workers are voluntarily seeking better positions, providing businesses with a wider array of qualified potential employees

Question 51

Structural

Answer 51

Long-lasting unemployment Can last for decades & usually requires a radical change to reverse Cause? Shifts in an economy Jobs are available… But there’s a mismatch between what companies need & what available workers offer What tends to exacerbat this unemployement? Technology Major fundamental shifts in an economy Caused by forces other than natural economic trends Reasons for structural unemployment include Technological Changes Poor training or lack of education Competition & globalization

Question 52

Seasonal

Answer 52

What? People work in seasonal jobs become unemployed when demand for labor decreases When does it occur? Specific time of year ends or a new season begins For example: Someone works at a resort during the summer might experience unemployment once the fall arrives Often takes place: Locations = high volumes of tourists

Question 53

Cyclical

Answer 53

Cause? Recession Generally… Rises during recessions Falls during economic expansions Contributes to total unemployment… Such as seasonal, structural, frictional, & institutional This type of unemployment = major concern Occurs when businesses do not have enough demand for labor When demand for a product & service declines Reduction in supply Fewer employees are required Employees = laid off

Question 54

Underemployment

Answer 54

Considered part of the labor force, yet… It refers to a situation in which… Individuals are forced to work in low-paying or low-skill jobs Individuals NOT working 40-hour work week Caused by a variety of factors Economic recessions to business cycles

Question 55

Big Picture Unemployment

Answer 55

1 of our most important indicators of economic health Negative Impacts: Adversely affects the disposable income of families Erodes purchasing power Diminishes employee morale Reduces an economy's output

Question 56

Describe the unemployment trend from 2010 to 2019?

Answer 56

Decreasing What do you think that meant for GDP? Increasing Why? Inverse relationship What year was unemployment at its highest? 2020 Why, what happened that year? Covid & lock downs

Question 57

What states in the Northeast have the highest unemployment rates? (3)

Answer 57

New York, Pennsylvania, Delaware What states in the Northeast have the lowest unemployment rates? (3) Vermont, New Hampshire and Rhode Island Which region has the lowest unemployment rates? Mid-west What is Montana’s unemployment rate? 2%

Question 58

Make a claim about the Map and the last 2 graphs (state, gender & race):

Answer 58

African American females living in California probably had higher rates of unemployment than a white males living in Alabama. Latinx female living in New York probably had higher rates of unemployment than white male living in Utah during the pandemic.

Question 59

I. Key Takeaways What does the business cycle mean?

Answer 59

Upswings & downswings in the broad measures of economic activity output, employment, income, & sales What are the alternating phases? Expansions & contractions

Question 60

3. When do recessions start & end?

Answer 60

Start? Peak of the business cycle – when an expansion ends End? At the trough of the business cycle – when the next expansion begins 4. How is the severity of a recession measured? 3D’s Depth, diffusion, & duration Strength of an expansion by how Pronounced, pervasive, & persistent it is

Question 61

II. Recession

Answer 61

Why is it considered a vicious cycle? Cascading declines in output, employment, income, & sales that feed back into a further drop in output, spreading rapidly from industry to industry and region to region What game is used to describe this cycle? Domino effect

Question 62

III. Recovery Why is it considered a virtuous cycle?

Answer 62

Rising output triggering job gains, rising incomes, and increasing sales that feed back into a further rise in output What needs to happen to the economy if the recovery is to last? Self-feeding

Question 63

How long does the business cycle usually last on average?

Answer 63

5 1/2 years  (since WWII) What was the longest economic expansion? 2009-2020 expansion (128 months0

Question 64

What are the 4 stages of the economic cycle?

Answer 64

Expansion Peak Contraction Trough

Question 65

2. What role does the Federal Reserve play?

Answer 65

Manages the cycle with monetary policy 3. What role do governing bodies play? Manages the cycle with fiscal policy 4. What else influences economic performance and the phases in the cycle? Consumer and investor confidence

Question 66

What is an economic expansion?

Answer 66

Growth throughout an economy Since productivity is increasing, how is it usually represented on a curve? Upward movement Why is the expansion phase also known as the "economic recovery”? It occurs after the economy has contracted for a long period

Question 67

What is often used to gauge economic output?

Answer 67

GDP What happens in the expansionary phase? Stock market experiences rising prices, & investors are confident Businesses receive more funding and make more, and consumers have more money to spend How long can it last? Years

Question 68

7. What happens at the end of this phase? expansionary

Answer 68

Economy begins to grow too fast Aka "overheating“ Unemployment rate is well below the natural rate Inflation is increasing

Question 69

peak When does it occur?

Answer 69

Expansionary indicators begin to level off before heading into a contraction How long can the transition take? Weeks to year What is going on with GDP? Rate falls below 2% & continues to decline How is the peak is displayed on a graph? Highest portion of the curve before moving downward

Question 70

VIII. Contraction

Answer 70

When does it begin? After the economy peaks When does it end? When GDP & other indicators cease to decrease What happens in this stage? Economy does not experience growth It shrink When does the economy enter a recession? GDP rate turns negative What happens during a recession? (3) Businesses lay off employees Unemployment rate rises above normal levels Prices begin to decline How is it portrayed on a graph? Consistently decreasing

Question 71

IX. Trough When is it reached?

Answer 71

Declining GDP begins to decrease its rate of negative change What is the next phase? Expansion phase How is it displayed on a graph? Lowest point of the curve When does the business cycle begin again? GDP begins to increase

Question 72

Short Term

Answer 72

In the short term the business cycle can look very toxic Example: 2020 Q1: 31.4% decrease Q2: 33.1% increase

Question 73

Long Term

Answer 73

Over the long-term stability is much more visible For example, from 2009 to 2020 there was a 2.4% increase

Question 74

What is inflation?

Answer 74

Rate at which prices for goods & services rise What are the 3 types? Demand-pull inflation, cost-push inflation, & built-in inflation What are the two most common indexes? Consumer Price Index & the Wholesale Price Index

Question 75

4. How is inflation viewed and why?

Answer 75

Positively or negatively Depending on the individual viewpoint & rate of change 5. Why would some like to see some inflation? Tangible assets (like property or stocked commodities) Raises the value of their assets

Question 76

What is the root of inflation?

Answer 76

Increase in the supply of money  What actions can increase a country’s money supply? Printing & giving away more money to citizens Legally devaluing (reducing the value of) the legal tender currency Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market (the most common method) Regarding the previous question, what happens to money? Loses its purchasing power

Question 77

Demand-Pull Effect:

Answer 77

When does it occur? Demand for good/service exceeds production capacity

Question 78

Cost-Push Effect:

Answer 78

When does it occur? Production costs increase prices

Question 79

Built-in inflation:

Answer 79

What causes it? Prices rise, workers demand rise in wages rise to maintain living costs

Question 80

A rising minimum wage would contribute to which of the following types of inflation?

Answer 80

Demand-Pull Effect People have more money, can buy more stuff, hence demand exceeds production capacity Cost-Push Effect Pay workers higher wages, hence production costs increase prices Built-in inflation People want higher wages to pay for higher costs Wage-Price Spira

Question 81

What does the CPI measure?

Answer 81

Weighted average of prices Basket of goods & services that are of primary consumer needs What is in this basket? Transportation, food, & medical care What is the CPI used to assess? Changes in prices associated w/ the cost of living

Question 82

What is the root of inflation?

Answer 82

Increase in the supply of money 

Question 83

What are the 3 types of Inflation?

Answer 83

Demand-Pull Effect: Demand for good/service exceeds production capacity Cost-Push Effect: Production costs increase prices Built-in inflation: Prices rise, workers demand rise in wages rise to maintain living costs

Question 84

How is Inflation & the CPI related?

Answer 84

The CPI measures inflation  Tracks changes in prices over time

Question 85

What caused Inflation in America?

Answer 85

Strong consumer demand Increased spending on goods & services i.e. Housing Cause – Simple Answer? (1) Increase in money supply Why? (2) Low unemployment  What type of inflation? Demand-Pull Improved financial conditions Cause? Govt intervention – fiscal & monetary policy Covid stimulus checks, tax cuts, tariffs & relief (lower intertest rates) Supply chain disruptions What type of inflation? Cost-Push Effect

Question 86

International Issues

Answer 86

Global supply chain disruptions Causes? (2) Covid Overstimulated economies Wars Ukraine (food, fertilizer, oil & gas) Gaza-Israel Houthi rebels – closed Red Sea

Question 87

Is Inflation getting Better or Worse?

Answer 87

Short Term = appear toxic, long term can make it feel not as bad Slowly getting better CPI reducing FED’s goal = 2% is healthy inflation

Question 88

Republican view – Causes of Inflation?

Answer 88

“Curb wasteful government spending” Enact “pro-growth tax and deregulatory policies …” Cut taxes & regulations “Make America energy independent” Oil & gas production Net total energy exporter total energy exports have been higher than total energy imports

Question 89

Democrat view – Causes of Inflation?

Answer 89

Inflation Reduction Act of 2022 (3) Focus on climate change Tax credits = green products Reduce drug prices Tax Reform 15% flat tax for corporations Tax stock buybacks

Question 90

Did Corporate greed cause Inflation?

Answer 90

Evidence in favor? (2) Corporate profits = record highs How can this be – struggling w/ costs & supply chains issues Bragging CEOs → raise prices Potential cause for record profits? Companies consolidating & swallowing up smaller businesses i.e. 80% of the beef & chicken industry is owned by 4 companies Impact? Little competition Impact? Less pressure to keep prices low

Question 91

So, is inflation caused by greed?

Answer 91

No = it’s the other way around Plane crash = gravity An excuse to be opportunistic Charge 800 bucks cheeseburger Greed in another form: competition What does greed force them to do? Offer low prices be/c they're trying to muscle out their competito

Question 92

Two main reasons for increased prices?

Answer 92

Increasing price of raw materials & goods (7%) Increasing price of labor (5%) How come workers aren’t demanding higher wages? Flexible conditions – hours/work from home

Question 93

If greed isn’t the issue, what is?

Answer 93

Consumer demand In spite of inflation, demand hasn't really blinked We don’t have more money – impact? Savings ↓ & debt ↑ Problem? Not sustainable What will happen if buying slows down? Companies = lower prices to entice us Impact? Inflation will ease Until demand drops Companies will push prices up as much as they can