Introduction to the U.S. Economy Chapter 1 Introduction to the U.S. Economy © OnlineTexts.com p. 1 Econweb.com

What is Macroeconomics? Macroeconomics is the study of the aggregate economy. It addresses the nature of and causes of the business cycle: waves of output growth and job creation, followed by periods of output contraction and rising unemployment. It deals with broad issues like unemployment inflation economic growth budget deficits and trade deficits © OnlineTexts.com p. 2 Econweb.com

Unemployment The unemployment rate is the percentage of the labor force that is unemployed. Given the U.S. labor force of approximately 150 million people, a one percentage point increase in the unemployment rate implies that an additional 1.5 million workers are unemployed. Thought question: What is the unemployment rate that the economy “should” have? Is it zero? © OnlineTexts.com p. 3 Econweb.com

Inflation Inflation is a sustained increase in the overall price level. Economists measure inflation as the percentage change in a particular bundle of goods and services. Thought questions: How much inflation is too much? What is deflation? © OnlineTexts.com p. 4 Econweb.com

Economic Growth Economic growth results from an increase in production from the economy over a particular period of time. Thought questions: How fast should the economy be growing each year? Can the economy grow too fast? © OnlineTexts.com p. 5 Econweb.com

Budget Deficits A budget deficit is the difference between government outlays and tax receipts. Deficits result when the government spends more than it collects in taxes, while surpluses result when tax revenues exceed outlays. Thought questions: What is the difference between a budget deficit and the national debt? Why are large budget deficits harmful? © OnlineTexts.com p. 6 Econweb.com

Trade Deficits A trade deficit occurs when a nation imports more goods & services than it exports. The U.S. has run trade deficits every year since the early 1980s. Thought questions: How does the U.S. “finance” the purchase of the surplus imports? What impact does the trade deficit have on the value of a nation’s currency? © OnlineTexts.com p. 7 Econweb.com

Stabilization Policy One of the primary goals of macroeconomics is to stabilize the business cycle. That is, reduce the fluctuations in output (and inflation) over time. Policy makers have two broad tools to help stabilize the economy: Fiscal Policy Monetary Policy © OnlineTexts.com p. 8 Econweb.com

Fiscal Policy Fiscal policy is the (federal) government’s manipulation of the budget to attempt to stabilize the nation’s level of output. The “tools” of fiscal policy include: changing taxes and transfers changing the level of government spending Thought question: Why in early 2003 did President Bush push through a new tax cut? © OnlineTexts.com p. 9 Econweb.com

Monetary Policy Monetary policy is the central bank’s (Federal Reserve) manipulation of the money supply and/or interest rates to attempt to stabilize the nation’s level of output. By lowering interest rates, the central bank hopes to spur additional investment and consumption. Thought question: What is the federal funds rate? the discount rate? © OnlineTexts.com p. 10 Econweb.com

Superb Economic Sites on the Net The Bureau of Labor Statistics publishes some of the major economic indicators on their Economy at a Glance web page. The Bureau of Economic Analysis contains up-to-date figures on the nation's output and income. The Dismal Scientist is an excellent web site giving daily updates and analysis of economic information. The St. Louis Federal Reserve Bank also has excellent time series of the major macroeconomic data. Look for FRED II (Federal Reserve Economic Data). © OnlineTexts.com p. 11 Econweb.com

Take the quiz… Where is the U.S. economy now? Refer to the Chapter 1 quiz questions. How many can you answer correctly? © OnlineTexts.com p. 12 Econweb.com