Don’t rock the boat, baby! Economic Stability Don’t rock the boat, baby!

Review of GDP GDP Real GDP Current prices Constant dollars total market value of all final goods/services produced in a year Real GDP adjusted for inflation Current prices used to calculate GDP before inflation adjustment Constant dollars used to calculate real GDP (compare years) Per Capital GDP GDP/population GDP as an indicator Why?

1, 2, 3… GDP…ah, ah, ah!! What doesn’t count? Population changes Quality changes Used goods The effect of harmful goods Non-market production Black market sales

1, 2, 3, 4, 4 types of unemployment…ah, ah,ah!! Frictional = temporary unavoidable College grads, new workers, changing jobs Seasonal = voluntary unemployment Rafting guide, ski instructor, lawn care Structural = lack skills for existing jobs Multi-media, shifting consumer preferences Cyclical = downturn in economy Economy-wide shortage of jobs

Will work for money Full employment Everyone except frictionally and structurally unemployed are working Economist combine the frictional and the structural and call it the natural rate of unemployment When the unemployment rate equals the natural rate we’re at full employment

Business Cycles Economic Fluctuations Peak production maxed, unemployment low, investment and spending high, demand high, prices increasing Recession (6 months declining real GDP) investment and spending reduced, demand low, production reduced, unemployment increasing, prices hover then fall

Business Cycles Flucted again Trough (lowest point) Production declining (below capacity), unemployment very high, investment and spending very low, demand stagnant, prices hover or fall Expansion Investment and spending increasing, production increases, unemployment declines, demand increasing, prices hover then increase

Fiscal Policy Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy.

Monetary Policy Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow.

3 Main Tools of the Fed Open Market Operations - The Fed uses open market operations when it buys or sells securities, such as Treasury notes, or mortgage-backed securities from the member banks. Discount Rate / Federal Funds Rate - The discount rate is the rate that the Federal Reserve charges banks to borrow at its discount window. Reserve Requirement - This basically states that banks must hold 10% (less for smaller banks) of their deposits on hand each night. The rest can be lent out. If a bank doesn't have enough cash on hand at the end of the day, it borrows what it needs from other banks (known as the Fed funds). Banks charge each other the Fed funds rate.

Economic Stabilizers Economic policies and programs that are designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers. The best-known automatic stabilizers are corporate and personal taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilizers are so called because they act to stabilize economic cycles and are automatically triggered without explicit government intervention.