1. Unit 3: Macroeconomic Concepts
The Impact of Economics on the American Economy

2. Micro vs. Macro What’s the difference?
Micro – studying economic behavior and decisions in small units  individuals, households, etc.
Macro – studying economic behavior and decision making in an entire economy  ex. Nation, state, etc.

3. Measuring the Economy We look at…
Overall levels of income
Employment
Prices
These data sources can provide a picture of the overall economy…
Why do you think this is?

4. What Impacts our Measurements?
Spending and production decisions made in the Resource (Factor) and Product Markets
Driven by households, business, and government
 Remember Circular Flow????

5. Gross Domestic Product (GDP)
The primary tool to measure the size of an economy
GDP is the total market value of all goods and services produced within a country in a given time period.
Let’s break down its components…

6. Parts of GDP
“Market Value” – GDP uses market prices for goods and services – discounted prices are not considered
“Final Goods” – only final goods are used in calculations (not intermediate goods).
the value of a loaf of bread would be counted while the flour to make the bread would not
this avoids “double counting”

7. Parts of GDP (continued)
“Produced within a country” – means ALL goods produced within U.S. borders are counted – even those by foreign companies.
goods produced by American companies outside U.S. borders are NOT counted
ex. Kia’s produced in Georgia are counted, but iPhones produced in China are not

8. Parts of GDP (continued)
“in given time period” – can be quarterly or yearly, but exact beginning dates are used from year to year.
ex. GDP for 2013 began at 12:00 am on January 1 and ended at 11:59 on December 31

9. GDP Measures Economic Growth
“Real” GDP is used to measure growth from one time period to the next
Nominal GDP uses current prices to determine market value
Real GDP adjusts prices for inflation to determine market value
Why is adjusting for inflation necessary for comparison?

10. Calculating GDP – Using the Expenditure Approach
Expenditure Approach – calculated by totaling transactions in the…
Product Market where goods and services are purchased
GDP = C + I + G + Net Exports (X-M)

11. GDP = C + I + G + (X-M)
C = Consumer Spending on Goods (durable and non-durable) & services I = Business Investment in capital goods G = Government Spending (X-M) = Total Exports – Total Imports give you net exports

12. Calculating GDP – Using the Income Approach
Calculated by totaling all transactions in the Factor Market
Income payments for land, labor, and capital acquired in the market (ex. Rent, wages, interest on loans, etc.)

13. Economic Growth
GDP Growth = Outward shift of Production Possibilities Curve

14. Economic Growth
Occurs when there is an increase in Real GDP compared to a previous time period.
(𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 2−𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 1) (𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 1) 𝑋 100

15. Influences on GDP
Aggregate Supply- the total amount of goods and services in the entire economy available at all possible price levels.
Simply add them all up for a total (aggregate) and calculate an average price (called price level)
Tells us all the goods available at various price levels

16. Aggregate Supply Curve
AS curve illustrates relationship between prices and output supplied (seen in GDP)

17. Influences on GDP (cont.)
Aggregate Demand- the amount of goods purchased at all possible price levels
This is driven by the collective behavior of consumers in an economy…

18. Aggregate Demand Curve
As Price Levels increase, demand for goods and services decreases (change in quantity impacts GDP)

19. Equilibrium in the Macro
Intersection of AS & AD is an “ideal” economy…
What effect would shifting Demand or Supply have on GDP?

20. Causes of Shifts in AS and AD
Business Investment
Increases lead to more jobs – AD & the GDP increases (economy grows)

21. Causes of Shifts in AS and AD
Consumer Expectations
Consumer confidence effects the economy
When good things are expected to happen, consumer confidence grows
spending increases, AD & economy (GDP) grows

22. Causes of Shifts Interest Rates (the cost of borrowing money)
Low rates = business investment grows and creates jobs & people borrow more $ to buy and do
AD and economy (GDP) grows

23. Causes of Shifts External Shocks impact AS
Negative – wars, droughts, trade disputes, natural disasters
cause AS & economy (GDP) shrinks
Positive – new discoveries of resources, record crop production due to perfect weather conditions
cause AS & economy (GDP) grows

24. Factors Impacting GDP & Economic Growth
Unemployment – refers to people who do not currently hold a job, but are actively seeking one.
Means we are inefficient using one of our major factors of production
Point of Underutilization in Production Possibilities

25. Factors Impacting GDP & Economic Growth
Inflation – Increase in average Price Level of all goods and services
AD is increasing faster than AS
Effects:
Decline in Purchasing Power of the dollar
Real Wages Decline because they grow slower than the Inflation Rate (IR)
Interest Rates Increase
Loss of $ in Savings Investments
Increased Production Costs

26. Factors Impacting GDP & Economic Growth
Types of Inflation
Demand-Pull Inflation – occurs when increased AD “pulls” prices higher
Cost-Push – occurs when costs for factors of production increase and “pushes” prices higher

27. Factors Impacting GDP & Economic Growth
Deflation – has opposite effect
Hyperinflation – Inflation Rate (IR) is several hundred % vs. normal rate that is (1% to 3%)
Stagflation – occurs when there is both a RISING Price Level and a DECREASE in Real GDP
Typically comes with rising unemployment

28. How We Measure These
Consumer Price Index (CPI) – measurement of inflation using a fixed group of products
“Market Basket” is the name we give those products
Used to determine a “Base Year” that is given a CPI of 100
is the current Base Year time period
Two ways to calculate it: See board

29. CPI Calculation
For calculation when you are using the value of market basket prices from one year to the next…
𝐶𝑃𝐼= 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑌𝑒𝑎𝑟 2 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑌𝑒𝑎𝑟 1 ×100

30. Calculating Inflation Rate
Inflation (IR) is calculated by using the CPI value from one year to the next… 𝐼𝑅= (𝐶𝑃𝐼 𝑌𝑒𝑎𝑟 2−𝐶𝑃𝐼 𝑌𝑒𝑎𝑟 1) (𝐶𝑃𝐼 𝑌𝑒𝑎𝑟 1) 𝑋 100

31. 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (Total Labor Force) x 100
Unemployment
Unemployed are those without a job, but actively seeking one
Another measure of our economy
Calculated by simple division:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (Total Labor Force) x 100

32. See Graphic Organizer & Article
Unemployment
Three (Four) Types
Structural
Cyclical
Frictional
(Seasonal)
See Graphic Organizer & Article

33. The Business Cycle

34. The Business Cycle
A graph that illustrates the relationship between real GDP and time.
Y-axis – Real GDP
X-axis – time

35. Four Parts of the Cycle
Peak – the highest point of real GDP between the end of an economic expansion and beginning of an economic contraction
Contraction – phase in cycle when real GDP is declining
> 6 months (two quarters) is recession
If long/sustained, it is depression

36. Four Parts of the Cycle
Trough – the lowest point of real GDP between the end of a contraction and beginning of a recovery
Recovery - when real GDP becomes positive after a period of negative real GDP
Recovery lasts until real GDP reaches the previous level at peak
Called expansion/prosperity after the previous level is achieved

37. Business Cycle Graph Activity
On your provided paper
Label Y-Axis as “Real GDP”
Label X-Axis as “Time”
Draw the Business Cycle on your graph as big as possible, but leave room for labels
On the back of the paper write the definitions for peak, trough, contraction, expansion, and recovery

38. Business Cycle Graph Answer these questions:
Why do you think the expansion on your chart is divided between a recovery and prosperity? How do you find the start of prosperity?
How long must a contraction last before it can be considered a recession?

39. Business Cycle Graph
Label the following economic indicators on your graph:
CPI CPI
Unemployment Unemployment
Real GDP Real GDP

40. Business Cycle Graph Closing discussion questions:
Monetary Policy is the Federal Reserve Bank’s power to increase or decrease the supply of money in the economy. They can do this by increasing or decreasing interest rates.
If the FED is worried about inflation, what would they want to do about the supply of money in the economy?
Would they raise or lower interest rates to do this?

41. Business Cycle Graph
Fiscal Policy is the power of Congress to increase or decrease taxes and increase or decrease government spending.
When the government is worried about inflation should they increase or decrease government spending?
Should they increase or decrease taxation?

42. The Federal Reserve and Monetary Policy
The Federal Reserve Bank
Created in 1913 to instill trust in the nation’s banks
“Banker’s Bank”
“Lender of the Last Resort” – Loans $ to banks, especially to struggling banks

43. The FED Public features
Created by Congress and can be dissolved by Congress
Has a Seven Member Board of Governors plus a Chairman and Vice-Chairman
Nominated by the President and confirmed by the Senate
Members are part of the Federal Open Market Committee (FOMC)
B.O.G. -14 Year term/Chair & Vice-Chair – 4 year term

44. The FED Public Features
The Fiscal Agent for the U.S. government – it’s the government’s bank
Holds its securities  Bonds
Regulates the nation’s money supply
U.S. Currency is a “Federal Reserve Note” – backed by the assets of the FED
Its profits are transferred to the U.S. treasury
Over $75 billion each year

45. The FED Private Features
It is decentralized with 12 district banks serving different regions of the country
Each of the 12 is organized as a private corporation and is self-financed
Makes money through interest on securities it holds
Gets payments for check clearing services
Board of Directors for each of the 12 banks has 2/3 of its members by privately controlled member banks

46. The FED
NY Federal Reserve Bank President is always a member of the FOMC
4 of the other Presidents serve as voting members
These 4 serve on a rotating basis
Five of the 12 district bank presidents serve as voting members of the Federal Open Market Committee

47. FED District Banks

48. Goals of the FED Promote Price Stability Promote Full Employment
No cyclical unemployment
Economic Growth

49. How does the FED Meet these Goals?
MONETARY POLICY
Refers to tools of the Federal Reserve to meet these goals
These tools impact the FED Funds Rate – the % rate banks charge one another

50. Tools of Monetary Policy
Open Market Operations – Most Common Tool
Buying and selling bonds/securities
Selling bonds reduces money supply
Buying bonds increases money supply

51. Open Market Operations
Individuals & banks use $ to buy bonds
Increases the FED Funds Rate - Less $ is available for spending and/or lending
Selling bonds increases the $ supply
Decreases the FED Funds Rate

52. Tool #2 Change the DISCOUNT RATE Second most common
It’s the interest rate that the FED charges banks on the money that they borrow
Raising the rate makes it more expensive to borrow money  less $ in economy & increases FED funds rate
Lowering  more $ (opposite effect)

53. Tool #3 Change the RESERVE REQUIREMENT Least Common Tool
% of deposits banks must keep on hand (in reserve) & can’t loan out
Raising % allows banks to lend less $ & increases FED funds rate
Ex. If bank has $10,000 & a reserve requirement of 10% -- it can only lend out $9,000
What if the requirement was changed to 20% - how much of the $10,000 could the bank lend?

54. Summary of Monetary Policy
Tight Money – uses tools to decrease money supply  fights inflation
Loose Money - uses tools to increase money supply  fights deflation or contraction in the economy

55. Government and Fiscal Policy
Fiscal Policy - the power of the government to use government spending and taxation policies to influence economic activity.

56. Fiscal Policy Goals
Price Stability
Full Employment
Economic Growth

57. Fiscal Policy Tools Taxation & Government Spending
Occurs at federal, state, and local levels
Typically proposed by the executive branch (ex. President) and legislature (ex. Congress) writes a bill to address the action
Bills often have many projects added on to it in order to get it passed & become a law
Many laws have clauses that allow additional taxes/spending without adding new laws

58. Tool #1: Taxation
Many taxes grow with the economy “automatic stabilizers”
Income Tax is a Progressive Tax because tax dollars paid increase as salary increases
Tax collection increases with inflation in salaries
Tax collection decreases with deflation in salaries
Sales Tax dollars collected also increase when prices of products increase

59. Use of Taxes
Tax increases = less consumer net income & spending declines
Raising taxes is a Contractionary Tool
Tax decreases = more consumer net income & spending increases
Lowering taxes is an Expansionary Tool

60. Tool #2: Government Spending
Governments can increase or decrease spending to influence the economy
More spending increases government investment more workers & businesses
Less spending decreases government investment less workers & businesses
What kind of fiscal tool was the New Deal supposed to be?
Why can’t the government keep spending more to keep the economy growing?

61. Debt vs. Deficit
What is the difference between a government budget deficit and government debt?

62. Debt vs. Deficit
Deficits – occur when government spending exceeds its revenue in their annual budget…occurs in one year
Opposite would be a Surplus
Balanced budget occurs when expenses = income
Debt – the compilation of all deficits plus interest owed…grows over many years

63. Government Debt
Why doesn’t the government cut back all its spending so we can get out of debt?
United States Debt