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

2. 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?

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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.

10. 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.

11. 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.