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Econ Department Final
Unit Three – Macroeconomics
Prepping for Success!
Econ Department Final Exam
Your Economics Departmental Final Exam is cumulative and will count as 5% of your
class grade.
Following is our Review Schedule:
Tuesday – we’ll review Unit One and Unit Two
Wednesday – we’ll review Unit Three and Unit Four
Thursday – we’ll review Unit Five and finish with a wrap-up game!
Econ Department Final Exam
Econ Study CardsTo help you, you’ll create one Study
Card per unit.
• You can write as much as you want
on each index card – front and back
• They will help you study and prepare!
• Each Study Card will count for a
classwork grade – 25 points/Study
Card
Your Name on each card Unit 1, 2, 3, 4 or 5
Complete Your Study Card As You Review!
As you review each unit, capture key information on your Study Card.
At the end of each unit review, there will be questions you have to answer.
These will receive a grade, so take them seriously!
Hint – everyone should make a 100% because you can go back and find the
answer if you don’t know it!
Here’s Your Timing
First half of class (45 min.)
30-35 minutes – review the unit and capture important info on your index card
10-15 minutes – answer the review questions
When you’re done, come show me your index card and I’ll give you the
access code for the next unit to review.
Second half of class (45 min)
30-35 minutes – review the unit and capture important info on your index card
10-15 minutes – answer the review questions
Unit Three Review
Each Unit Review will ‘unpack’ our unit learning standards to help
you understand what you need to know.
We’ll take each learning standard and break it down. Please pay
particular attention to the bold/colored words and make sure you
include this information on your Unit Summary Index Card.
Unit 3 Learning Standard #1 of 3
SSEMA1 Illustrate the means by which economic activity is measured.
a. Identify and describe the macroeconomic goals of steady economic growth, stable
prices, and full employment.
b. Define Gross Domestic Product (GDP) as the sum of Consumer Spending, Investment,
Government Spending, and Net Exports (output expenditure model).
c. Define unemployment rate, Consumer Price Index (CPI), inflation, real GDP, aggregate
supply and aggregate demand and explain how each is used to evaluate the
macroeconomic goals from SSEMA1a.
d. Give examples of who benefits and who loses from unanticipated inflation.
e. Identify seasonal, structural, cyclical, and frictional unemployment.
f. Define the stages of the business cycle, including: peak, contraction, trough,
recovery/expansion as well as recession and depression.
Economic Freedom
• Consumers and producers make their own economic decisions
• Choose their own occupations, employers, and uses for their money
• Choose what, where, and how to produce
Economic Efficiency• Use scarce resources well and not wasteful
Economic Equity/Equality
• Equal pay for equal work
• People are fair in both their purchases and sales
Economic Security
• Protection from adverse events such as layoffs and illnesses
• Social Security
Full Employment• Provide as many jobs as possible
Price Stability• Prices do not go up or down too much, too often
• Inflation – general rise in prices
• Deflation – general fall in prices (dollar worth less)
Economic Growth• More jobs means more money for people
Macroeconomics
Macroeconomics gives us a overall view of economic activity
Macroeconomics is the study of the whole economy together –
the aggregated (everything added up) spending, saving, and
investing decisions of all consumers and businesses
These factors together – households, businesses, government,
and net exports – describe the health of the economy as a
whole!
Key Economic Indicators
The health of the economy and the “big picture” of economics is
measured in several ways
These include:
Gross Domestic Product (GDP)
The Consumer Price Index (CPI) This is a measure of the rate of inflation
Unemployment
Gross Domestic Product (GDP)
To compare our system with other countries’ systems, and to
compare the strength of our own economy year to year,
economists use something called the
Gross Domestic Product (or GDP), which is
the total dollar value of all final goods and
services produced within a country during
one calendar year.
Gross Domestic Product (GDP)
GDP is measured by assessing the total expenditures (spending) of
four different economic sectors:
1. Consumers (C) – Consumer Spending
2. Government (G) – Government Spending
3. Investment (I) – Investments from Industry
4. Net Exports (NX) – Exports Minus Imports
Gross
Domestic
Product
Famous Economic Formula
GDP= C+G +I+(X-M)
C= Personal consumption expenditures (consumer
spending).
Includes
durable goods: a lifetime of more than one year, and
non-durable goods: a lifetime of less than one year, and services.
Durable vs. Non-Durable Goods
G = Government Purchases
The dollar amount that
federal, state, and local
governments spend on items
IE: highways, education,
defense, etc.
Government Purchases
Levels of Spending
Federal/National
State
City
I = Capital Investment
Total value of all capital goods investment/purchases in a given nation during one year.
Fixed investment: Buildings, machinery, equipment
Inventory investment: raw materials, intermediate goods, final goods
InvestmentFixed Investment Inventory Investment
Raw Materials
Intermediate Goods
Finished Goods
Net Exports
The reason we subtract our imports from our exports is this:
Exports - The money other countries spend on our exports adds value to our economy
Imports - The money we spend on goods imported from other countries takes money out of our economy
So, the net export expenditure iscalculated only when the transactions add value to our economy!
Exports vs. Imports
Goods & services made in our own country
Other countries buy them & add to our economy
Goods &
services made
in other
countries
When we buy
other
countries’
goods &
services it
does NOT add
to our
economy
GDP does NOT include:
value of used products
value of volunteer work
purely financial transactions
value of intermediary goods
Transfer of assets
Value of non-market activities (DIY)
Underground economies (anything not reported to the government
Unemployment
To again monitor the health of our economy, economists
measure the Unemployment Rate.
Each month, they survey certain Americans to find out their
employment status.
The U.S. Government defines “employed” as people 16 and
older meeting one or more of the following criteria.
Criteria to be considered “Employed”
1. Working for pay or profit for 1 or more hours this week.
2. Working without pay in a family business 15 or more
hours.
3. Having a job, but being ABSENT due to illness, weather,
vacation, etc.
The U.S. Government defines
“Unemployed" as:
1. NOT meeting any of the criteria above
AND
2. ACTIVELY looking for work during the past 4 weeks.
The most closely watched and highly publicized labor force statistic is
the UNEMPLOYMENT RATE=the percentage of people in the civilian
labor force who are UNEMPLOYED.
Unemployment
rate
unemployed
labor forcex 100=
Measuring Unemployment
Why is there Unemployment?
In the end, unemployment depends on supply and demand – the
supply of able workers and the demand by businesses for those
employees
Some, but not all, unemployment is the result of a downturn in the
economy – a change in supply or demand
Economists classify four different types of unemployment
4 Types of Unemployment
Structural
Cyclical
Frictional
Seasonal
STRUCTURAL Unemployment
Unemployment that occurs as a result of changes in technology,
consumer preferences, or in the way the economy is “STRUCTURED.”
EX: Many TV repairmen had to find new work as televisions are
now built with transistors instead of tubes.
CYCLICAL Unemployment
This unemployment results from contractions in the economy.
This type of unemployment HARMS the economy more than any other types of unemployment.
During the Great Depression, the unemployment rate reached an all time high of about 25%.
As recently as 2009 and 2010, the unemployment rate reached 10.2%.
FRICTIONAL Unemployment
People who have decided to leave one job and LOOK for another
typically better job.
Also, new entrants and re-entrants into the LABOR FORCE.
Economists consider frictional unemployment as a NORMAL part of a
healthy and changing ECONOMY.
SEASONAL Unemployment
This predictable unemployment fluctuates as a result of HOLIDAYS,
school breaks, and industry PRODUCTION schedules.
Consumer Price Index
The Consumer Price Index (CPI) is a measure of the change in prices in an economy
Economists add up the total price of a “market basket” of typical items bought by the average family in a month
Then, they compare the total price of these goods to the total price of the same items during a base period (or previous year) by dividing the total by the base
Then, they multiply the result by 100 to have an index figure for comparison purposes
CPI = cost of today’s market basket
cost of a market basket in previous timeX 100
Let’s Look at an Example…
Let’s say that in 2006, a year that we would like to serve as our baseyear, the market basket cost $960
Then, we measure the same goods again in 2007 and find that they cost $1000
So, it works out like this:
CPI = 1000
960
CPI = 1.04 X 100
CPI = 104
X 100Remember, this number is an index figure. By itself, it doesn’t tell us much. We compare it to 100 (the base number integer that is always used) to figure out the percentage change!
Inflation and Growth
On the other hand, if prices increase but the economy does
not grow, a condition called stagflation occurs. Stagflation
is when there is high inflation, the economic growth rate
slows and unemployment remains high.
Inflation and Growth
High inflation hurts wage earners because the money they
make is now worth less
Some businesses may offer cost-of-living adjustments for their
employees to balance out the effects of inflation
What Have We Learned So Far?
• GDP
• Definition The total dollar value of
all final goods and services
produced within a country
during one calendar year.
• Formula
• C + G + I + NX = GDP
• What does it measure?• Output, productivity, growth
• We measure spending, because if people are
buying then someone’s making it, too!
What Have We Learned So Far?
• Inflation• What is it?
• Measured by CPI – Consumer Price Index
• What is the ‘Market Basket’?
• Purchasing Power – how far does our money go?
• When prices/inflation goes up – what happens
to our purchasing power? Purchasing Power
goes down
• When prices go down – what happens to our
purchasing power? Purchasing Power goes up
• Winners and Losers
• Winners – ex. Borrowers
• Losers – Lenders/Banks
What Have We Learned So Far?
• Unemployment
• What’s ‘employed’?
• What defines ‘unemployment’?
• 4 types
• Frictional • normal, got the training, in between jobs
• Structural• Job is outsourced, replaced by tech, need new training
• Cyclical • worst kind, downturn in overall economy forces layoffs
• Seasonal• Part-time, holidays only, peak sales periods
Now That We Understand Our Measurements…
Measures Measurement Tool
Growth, Output, Productivity GDP
Unemployment Unemployment Rate
Inflation/Costs CPI
Now we need to see what the ‘measurements’ tell us!
By Understanding the Measurements We
Understand the Health of Our Economy
Economies ‘flow’ in a continuous rhythm of
good times and not-so-good times
What’s a Cycle?
Does a roller coaster car every go away from the tracks?
I hope not!
Does the roller coaster car keep going around & around?
Well, yeah!
So that’s how a roller coaster is like a cycle…it keeps going around and around!
A Business Cycle Keeps Going…
Round and round, but
with some ups and
downs!
Today we’re going to
look at those ups and
downs.
Business Cycles
Fluctuations in Real GDP are referred to as Business Cycles.
The duration and intensity of each phase of the Business Cycle are
not always clear.
Business Cycles are typical of Market, Capitalistic economies due to
the free nature of those economic systems
Phases of the Business Cycle
Expansion/Recovery
Peak
Contraction/Recession
Trough
Expansions are periods of increasing Real GDP.
Unemployment decreases, businesses expand, and Personal
Consumption increases.
As expansions continue, there tend to be upward pressures on
prices (inflation) and interest rates.
Expansions
A Word About Interest Rates
The amount of money charged as a fee for lending money.
The price of borrowing money.
As interest rates rise LESS consumers will borrow money IF they are
WILLING and ABLE
As interest rates fall MORE consumers will borrow money IF they are
WILLING and ABLE
Peak
A peak is a period when the economy starts to level off.
Businesses postpone new investments, and consumer saving tends to
increase.
Rising prices and interest rates tend to restrict purchases and
investments, often leading to a Contraction.
Contraction
A Contraction is a period of declining Real GDP.
Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours.
Interest rates and prices level off, and often decline during long contractions.
Recession:
Six months of declining Real GDP
Depression:
Twelve months of declining Real GDP coupled with at least 15%
unemployment.
Long Term Contractions
Trough
A Trough is the bottom of a
Contraction. Lowest interest rates
and prices bring customers back to
markets.
% Change in Real GDP
Contraction
Expansion
Peak
Trough
0%
Unit 3 Learning Standard #2 of 3
SSEMA2 Explain the role and functions of the Federal Reserve System.
a. Explain the roles/functions of money as a medium of exchange, store of value, and unit of account/standard of value.
b. Describe the organization of the Federal Reserve System (12 Districts, Federal Open Market Committee (FOMC), and Board of Governors).
c. Define monetary policy.
d. Define the tools of monetary policy including reserve requirement, discount rate, open market operations, and interest on reserves.
e. Describe how the Federal Reserve uses the tools of monetary policy to promote its dual mandate of price stability and full employment, and how those affect economic growth.
Functions of Money
Money is any good that is widely accepted in exchange of goods and services, as well as
payment of debts.
Three functions of money are:
1. Medium of exchange: Money can be used for buying and selling goods and services.
If there were no money, goods would have to be exchanged through the process of barter
(goods would be traded for other goods in transactions arranged on the basis of mutual
need). Such arrangements are often difficult.
2. Unit of value: Money is the common standard for measuring relative worth of goods and
service.
3. Store of value: Money is the most liquid asset (Liquidity measures how easily assets can
be spent to buy goods and services). Money’s value can be retained over time. It is a
convenient way to store wealth.
Functions of Money
Unit of value
Store of value
Medium of exchange
Characteristics of Money
Portable
Durable
Divisible
Uniform
Limited
Acceptable
MoneyCredit Cards
Credit cards represent a loan. The card (or the
number) is simply a way to access a line of credit.
On the other hand, a debit card is a way to spend
checkable deposits, just like a paper check.
Money, Money, Money!
As you have learned, the economy operates around money
Before 1913, hundreds of national banks could print as much paper money as they wanted, as often as they wanted!
They could also loan out money when times were good, or refuse to loan money when times were bad
These practices made huge profits for bankers, but greatly hurtthe economy as a whole!
So, the government created a solution…
The Federal Reserve System
A special bank, referred to as The Federal Reserve (“the Fed”), was established in 1913 to help control the money supply (or, the amount of money) in the economy
These tasks are called monetary policy – or, the regulation of the amount of money available in the economy
The Fed does this in order to promote economic growth and full employment to limit the impact of inflation and recessions
These are called the “goals” of monetary policy!
Other Fed Responsibilities
Another huge task that the Fed is responsible for is controlling what the banks can and cannot do
They do this to make sure that banks are all playing by the same rules!
The most important job is to tell the banks how much of their money must be held in the form of reserves
Reserves are money that the bank must keep in its vault instead of loaning out for a profit!
Why do you think it’s important for banks to hold some money as reserves?
Structure of the Fed
The Fed is often discussed as the nation’s central bank – but, it is actually a system
The Federal Reserve System is made up of 12 different banks in various regions of the nation
Each of these banks is able to print paper money, called Federal Reserve Notes
The system as a whole is run by a Board of Governors, who are appointed by the U.S. President
The Chairman of the Federal Reserve is Janet Yellen
The monetary policy of the Fed is decided and enforced by the Federal Open Market Committee (FOMC)
Organization of the Federal Reserve
Tools of the Federal Reserve
The Federal Reserve has several ‘tools’ they can use to
help our economy:
1.Federal Open Market Committee
2.Reserve Requirements
3.Discount Rate
Federal Open Market Committee (FOMC)
Regulates the money supply by buying and selling
securities, or bonds
Securities or bonds are documents issued by the government for
which you pay a set price now, in exchange for a higher fixed
amount (called the “face value”) later
When securities are bought and sold, this is called an “open-market
operation”
A bond usually “matures” – or can be exchanged for its face value
– in 5, 10, or 20 years
Federal Open Market Committee (FOMC)
When the economy is in a recession, the Federal Reserve will
try to stimulate consumer demand by increasing the money
supply
The money that it pays for these securities then goes into the banking
system, and thus, increases the money supply to the public
When banks have more money to lend, they lower their interest rates
Down the line, the point of the Fed’s actions are
to encourage economic growth!
Remember Inflation?
Sometimes, though, the problem in the economy is that it’s growing too fast
This leads to a rapid increase in prices, and could lead to overproduction
Then, the Fed will sell bonds to the public, and keep the money they pay for them as reserves in their vaults
This lowers the money supply available to the public in order to curb inflation and control production rates (leads to higher interest rates)
So, the use of securities is a give and take!
Reserve Requirements
Another tool of the Federal Reserve is reserve requirements.
Reserve requirements are the amount of consumer deposits that
banks have to hold in ‘reserve’ for an average amount of daily
withdrawals.
Acts as a protection from ‘runs on the bank’
Our current reserve requirements are 10%.
Reserve Requirements
If the Fed wants to increase the money supply they can lower the
discount rate
Banks have more money to lend out
If the Fed wants to decrease the money supply they can increase
the discount rate
Banks have less money to lend out
One More Task…
The Fed may also regulate the money supply through the discount rate
The discount rate is the interest rate that the Federal Reserve charges other banks to lend them money
When the discount rate is high, banks don’t borrow as much money and they charge higher interest to the public (lower money supply)
When the discount rate is low, banks want to borrow more money to make more profit on loans (higher money supply)
Let’s Review – Monetary Policy!
Word Clues
Monetary Policy = Money Supply in Economy
Federal Reserve
Tools They Use:
Federal Reserve
Monetary Policy
Tools
Ways They Can:
Increase Money Supply
Ways They Can:
Decrease Money Supply
FOMC – Open Market
Buying/Selling Govt Bonds
Buy Bonds(more money in the
economy)
Sell Bonds(less money in the
economy)
Reserve Requirement – How
much $$ banks have to
‘reserve’ for withdrawals
Lower Reserve
Requirement(banks can loan out
more money)
Increase Reserve
Requirement (banks has less money
for loans)
Discount Rate – interest rate
the Fed charges member
banks for loans
Lower Discount Rate(Cheaper to borrow
money)
Raise Discount Rate(more expensive to
borrow money)
Unit 3 Learning Standard #3 of 3
SSEMA3 Explain how the government uses fiscal policy to promote price
stability, full employment, and economic growth.
a. Define fiscal policy.
b. Explain the effect on the economy of the government’s taxing and
spending decisions in promoting price stability, full employment, and
economic growth.
c. Explain how government budget deficits or surpluses impact national
debt.
What is Fiscal Policy?
Fiscal policy is the government’s attempt to influence or stabilize the
economy through taxing and government spending
Fiscal Policy, think…
• Government as in Congress
• Only Congress can tax
• Only Congress can spend tax dollars
When I Say Government, I Mean…
Legislative Branch/Congress
is responsible for
government spending (with
Presidential approval)
Try Not To Get Confused!
Type Controlled By Tools
Fiscal Policy Government/Congress 1. Taxing
2. Spending
Monetary Policy Federal Reserve
Money Supply
1. Open Mkt
Operations
2. Reserve
Requirements
3. Discount Rate
Demand Side Policies
Fiscal policies are designed
to increase employment by
stimulating demand
How does the Government get involved?
The govt. is the only thing big enough to offset a downward spiraling economy
The govt. can undertake its own spending to offset the spending in other parts of the economy – like businesses
The government can also lower taxes to increase borrowing and push consumers to spend more
So, if business spending was down $50billion – the government might spend $10 billion building a dam, $20 billion in grants to fix neighborhoods, and $20 billion in other ways
This spending would offset the $50 billion that businesses did not spend
Or – instead of spending, the government could just reduce
taxes giving consumers and businesses more purchasing
power
Supply Side Policies
Designed to stimulate output and lower unemployment by increasing production NOT by stimulating demand
The key goal here is to reduce the governments role in the economy
Reducing federal agencies
Less government spending
Deregulating firms – allowing them to produce at full capacity
Measuring the Economy
Review: What other ways have we discussed that measure economic health?
Gross Domestic Product (GDP)
Unemployment (Unemployment Rate)
Inflation (CPI)
Many economists also measure the economy by looking at the government’s budget
The government’s budget is based on how much money it will spend compared to how much money it will take in through taxes
What do you think is the goal of the budget?
The Deficit and Debt
If the government spends more money than it takes in for the year, it
is operating under a budget deficit
This is more of a prediction – the idea that the government will
have less money in the end
If the government has a deficit, it needs to borrow money to finance
the difference – this is called the national debt
It is all of the money that the government borrows to make up for
the extra money it spends!
The National Debt
Like any borrower, the government must pay interest on its debt
Today, a big chunk of the government’s tax revenues go towards
paying this interest (in other words, taxes go towards paying for
money that the government has already spent)
Because money is going towards interest instead of goods and
services, these payments limit the growth of the nation’s GDP
Thus, economists look at the deficit and debt to continue measuring
our economic health
National Debt
Each time the government borrows money it adds to the
national debt, the total amount of money owed by the
federal government.
Is the sum of all past deficits plus interest.
Government Deficits
When the government spends more money in a fiscal
year than it has brought in
National Deficit vs. National Debt
Deficit vs. Debt
Aggregate Demand & Supply
In individual markets, supply and demand interact to
establish prices. In the nation as a whole, aggregated supply
and aggregated demand interact to determine whether the
economy is growing or declining.
What is this??
What Does It Tell Us?
Supply and Demand in
Microeconomics
What’s the Difference??
A Lot Alike, A Little Different
How is Aggregate Supply and Aggregate
Demand Different?(than Regular Supply and Demand)?
Main difference is that aggregate demand and aggregate supply are
plotted based on total output, measured as GDP.
So…
Now Let’s Review…
Monetary Policy Vs. Fiscal Policy
Who’s in Control Who’s in Control
Federal Reserve Government/Congress
Day-to-Day most Important
is the FOMC
Now Let’s Review…
Monetary Policy Vs. Fiscal Policy
Tools to Use Tools to Use
#1 FOMC - Buying/Selling Bonds #1 Taxing
#2 Reserve Requirement #2 Spending
#3 Discount Rate
Now Let’s Review…
Economic Needs Economic Needs
Warming Upin Contraction/ Recession
Cooling Downinflation high, nearing Peak
Warming Upin Contraction/ Recession
Cooling Downinflation high, nearing Peak
Econ Talk: Expansionary Econ Talk:
ContractionaryEcon Talk: Expansionary Econ Talk:
Contractionary
How To Do It?(Big Picture)
Increase money
supply
How To Do It?(Big Picture)
Decrease
money supply
How To Do It?(Big Picture)
Increase money
supply
How To Do It?(Big Picture)
Decrease
money supply
Talking Details #1
Buy Bonds Sell Bonds Lower Taxes Raise Taxes
Talking Details #2
Lower Reserve
Requirement
Increase Reserve
Requirement Increase spending
Decrease
spending
Talking Details #3
Lower Discount
Rate Increase Discount
Rate
Monetary Policy Fiscal Policy
