The study of the economics of countries. The big picture

The Business Cycle Expansion Growth Peak Contraction Recession TroughExpansion Upturn/Recovery

Business Cycle Recession = when Real GDP decreases for a period of 6 months or more Bad Depression = when Real GDP has a steep decrease or last for a long time Really bad

Gross Domestic Product (GDP) GDP is the value of everything made or done in a country over a year of time. GDP is calculated by adding consumer spending, C, business investments, I, government spending, G, and exports minus imports, Xn. GDP = C + I + G + Xn Economy grows = GDP Economy shrinks = GDP

Gross Domestic Product (GDP) There are two types of GDP: GDP before inflation is measured = nominal GDP GDP after inflation is measured and GDP is adjusted = real GDP = GDP - CPI Inflation = an increase in the prices of goods and services Deflation = a decrease in the prices of goods and services

Consumer Price Index (CPI) How do you figured out inflation? You must figure out the Consumer Price Index (CPI) CPI = Cost of today’s “Market Basket”/Cost of last year’s “Market Basket” x 100 Market Basket = The typical cost of items an average family would buy in a month

Consumer Price Index (CPI) Growth occurs when GDP is bigger than CPI. If it isn’t, stagflation occurs. Stagflation is when the CPI is higher than GDP. Stagflation is bad. Cost-of-living adjustment Your pay increases with inflation.

Unemployment Structural = you don’t have the skills necessary for available jobs Frictional = you don’t have a job because you want a better job/pay than the available jobs offer Seasonal = your job depends on the seasons/weather Cyclical = you lose your job because of the Business Cycle

Aggregate Supply and Demand Aggregate Demand (AD) Total amount of goods and services that all of the people in an economy are willing to buy. Real GDP Price Level 0 AD

Aggregate Supply and Demand Aggregate Supply (AS) Total amount of goods and services that all producers in an economy are willing and able to make. Price Level Real GDP 0 Short-run Long-run (Limited by resources)

Monetary and Fiscal Policy Monetary Policy (The Federal Reserve) Fiscal Policy (The Federal Government) Contractionary Tools Shrink the amount of money. 1.Sell Bonds 2.Increasing the discount rate 3.Increasing the reserve requirements 1. Decreasing government spending 2. Raising taxes Expansionary Tools Expand the amount of money. 1.Buy Bonds 2.Decrease the discount rate 3.Decrease the reserve requirements 1.Increase government spending 2.Lower taxes

Monetary and Fiscal Policy Monetary Policy = The amount of money available in the economy. Fiscal Policy = The national economic growth and stability Discount Rate = The interest rate the Federal Reserve charges banks to lend them money. Reserve Requirement = The % of bank deposits that must be kept on hand at a bank for withdrawals.

Budget Deficits and the National Debt Budget Deficit = When the government spends more money then it takes in taxes. National Debt = When the government borrows money to cover the deficit from the budget. The nation pays interest on the money it borrows to cover the budget deficit.