1. Unit 3: Macroeconomic Concepts
The Impact of Economics on the American Economy

2. Micro vs. Macro What’s the difference?
Micro – studying economic behavior and decisions in small units  individuals, households, etc.
Macro – studying economic behavior and decision making in an entire economy  ex. Nation, state, etc.

3. Measuring the Economy We look at…
Overall levels of income
Employment
Prices
These data sources can provide a picture of the overall economy…
Why do you think this is?

4. What Impacts our Measurements?
Spending and production decisions made in the Resource (Factor) and Product Markets
Driven by households, business, and government
 Remember Circular Flow????

5. Gross Domestic Product (GDP)
The primary tool to measure the size of an economy
GDP is the total market value of all goods and services produced within a country in a given time period.
Let’s break down its components…

6. Parts of GDP
“Market Value” – GDP uses market prices for goods and services – discounted prices are not considered
“Final Goods” – only final goods are used in calculations (not intermediate goods).
the value of a loaf of bread would be counted while the flour to make the bread would not
this avoids “double counting”

7. Parts of GDP (continued)
“Produced within a country” – means ALL goods produced within U.S. borders are counted – even those by foreign companies.
goods produced by American companies outside U.S. borders are NOT counted
ex. Kia’s produced in Georgia are counted, but iPhones produced in China are not

8. Parts of GDP (continued)
“in given time period” – can be quarterly or yearly, but exact beginning dates are used from year to year.
ex. GDP for 2013 began at 12:00 am on January 1 and ended at 11:59 on December 31

9. GDP Measures Economic Growth
“Real” GDP is used to measure growth from one time period to the next
Nominal GDP uses current prices to determine market value
Real GDP adjusts prices for inflation to determine market value
Why is adjusting for inflation necessary for comparison?

10. Calculating GDP – Using the Expenditure Approach
Expenditure Approach – calculated by totaling transactions in the…
Product Market where goods and services are purchased
GDP = C + I + G + Net Exports (X-M)

11. GDP = C + I + G + (X-M)
C = Consumer Spending on Goods (durable and non-durable) & services I = Business Investment in capital goods G = Government Spending (X-M) = Total Exports – Total Imports give you net exports

12. Calculating GDP – Using the Income Approach
Calculated by totaling all transactions in the Factor Market
Income payments for land, labor, and capital acquired in the market (ex. Rent, wages, interest on loans, etc.)

13. Economic Growth
GDP Growth = Outward shift of Production Possibilities Curve

14. Economic Growth
Occurs when there is an increase in Real GDP compared to a previous time period.
(𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 2−𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 1) (𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑒𝑎𝑟 1) 𝑋 100

15. Influences on GDP
Aggregate Supply- the total amount of goods and services in the entire economy available at all possible price levels.
Simply add them all up for a total (aggregate) and calculate an average price (called price level)
Tells us all the goods available at various price levels

16. Aggregate Supply Curve
AS curve illustrates relationship between prices and output supplied (seen in GDP)

17. Influences on GDP (cont.)
Aggregate Demand- the amount of goods purchased at all possible price levels
This is driven by the collective behavior of consumers in an economy…

18. Aggregate Demand Curve
As Price Levels increase, demand for goods and services decreases (change in quantity impacts GDP)

19. Equilibrium in the Macro
Intersection of AS & AD is an “ideal” economy…
What effect would shifting Demand or Supply have on GDP?

20. Causes of Shifts in AS and AD
Business Investment
Increases lead to more jobs – AD & the GDP increases (economy grows)

21. Causes of Shifts in AS and AD
Consumer Expectations
Consumer confidence effects the economy
When good things are expected to happen, consumer confidence grows
spending increases, AD & economy (GDP) grows

22. Causes of Shifts Interest Rates (the cost of borrowing money)
Low rates = business investment grows and creates jobs & people borrow more $ to buy and do
AD and economy (GDP) grows

23. Causes of Shifts External Shocks impact AS
Negative – wars, droughts, trade disputes, natural disasters
cause AS & economy (GDP) shrinks
Positive – new discoveries of resources, record crop production due to perfect weather conditions
cause AS & economy (GDP) grows

24. Factors Impacting GDP & Economic Growth
Inflation – Increase in average Price Level of all goods and services
AD is increasing faster than AS
Effects:
Decline in Purchasing Power of the dollar
Real Wages Decline because they grow slower than the Inflation Rate (IR)
Interest Rates Increase
Loss of $ in Savings Investments
Increased Production Costs

25. Factors Impacting GDP & Economic Growth
Types of Inflation
Demand-Pull – occurs when increased AD “pulls” prices higher
Cost-Push – occurs when costs for factors of production increase and “pushes” prices higher

26. Factors Impacting GDP & Economic Growth
Deflation – decrease in overall Price Levels
Hyperinflation – Inflation Rate (IR) is several hundred % vs. normal rate that is (1% to 3%)
Stagflation – occurs when there is both a RISING Price Level and a DECREASE in Real GDP
Typically comes with rising unemployment

27. How We Measure These
Consumer Price Index (CPI) – measurement of inflation using prices for a fixed group of products (called the “Market Basket”).
The “Base Year” (comparison year) is given a standard value or “index” of 100
is the current Base Year time period

28. CPI Calculation
Calculating inflation using a standard “market basket”…
𝐶𝑃𝐼= 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑌𝑒𝑎𝑟 2 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑌𝑒𝑎𝑟 1 ×100

29. Calculating Inflation Rate
Inflation (IR) is calculated by using the prices from one year to the next…
𝐼𝑅= ( 𝑌𝑒𝑎𝑟 2 𝑃𝑟𝑖𝑐𝑒−𝑌𝑒𝑎𝑟 1 𝑃𝑟𝑖𝑐𝑒) (𝑌𝑒𝑎𝑟 1 𝑃𝑟𝑖𝑐𝑒) 𝑋 100

30. Factors Impacting GDP & Economic Growth
Unemployment – refers to people who do not currently hold a job, but are actively seeking one.
Means we are inefficient using one of our major factors of production
Point of Underutilization in Production Possibilities

31. 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (Total Labor Force) x 100
Unemployment
Unemployed are those without a job, but actively seeking one
Another measure of our economy
(4-6% is “normal”)
Calculated by simple division:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (Total Labor Force) x 100

32. See Graphic Organizer & Article
Unemployment
Three (Four) Types
Structural
Cyclical
Frictional
(Seasonal)
See Graphic Organizer & Article

33. The Business Cycle

34. The Business Cycle
A graph that illustrates the relationship between real GDP and time.
Y-axis – Real GDP
X-axis – time

35. Four Parts of the Cycle
Peak – the highest point of real GDP between the end of an economic expansion and beginning of an economic contraction
Contraction – phase in cycle when real GDP is declining
> 6 months (two quarters) is recession
If long/sustained, it is depression

36. Four Parts of the Cycle
Trough – the lowest point of real GDP between the end of a contraction and beginning of a recovery
Recovery - when real GDP becomes positive after a period of negative real GDP
Recovery lasts until real GDP reaches the previous level at peak
Period of expansion
Called prosperity after the previous level is achieved

37. The Federal Reserve Bank and Monetary Policy
Called the FED for short
In charge of MONETARY POLICY
Notice “monetary” looks like “money”
Created in 1913 to instill trust in the nation’s banks
Regulates how much $ is in the economy
Called the MONEY SUPPLY
Our $ is called a FEDERAL RESERVE NOTE

38. The FED (cont.) Our Government’s Bank Holds its assets (Bonds, etc.)
Regulates how much $ is circulating through the economy
Called MONEY SUPPLY
Our currency is called a FEDERAL RESERVE NOTE
Backed by FED’s assets – give $ value
It’s profits go to the government –
OVER $75 BILLION a year

39. THE FED (cont.) It’s the “BANKER’S BANK” It helps struggling banks
It backs our deposits
It is a “lender of last resort” to banks
They usually borrow from other banks
FED helps when needed

40. Primary Goals of the FED
Goals to support economic growth of our economy
Goal 1: Promote Price Stability
Goal 2: Promote Full Employment (Job Growth)
Help prevent cyclical unemployment

41. Structure of the FED Public features
Created by Congress and can be dissolved by Congress
Led by Chairman and Vice-Chairman – serve four year term
Has a Seven Member Board of Governors that includes Chairman and Vice-Chairman
Nominated by the President and confirmed by the Senate
Serve 14 year terms
Members are part of the Federal Open Market Committee (FOMC)

42. Structure of the FED (cont.)
Private Features
It is decentralized with 12 district banks serving different regions of the country
Each of the 12 is organized as a private corporation and is self-financed
Makes money through interest on securities it holds
Gets payments for check clearing services
Board of Directors for each of the 12 banks has 2/3 of its members by privately controlled member banks

43. Structure of the FED (Cont.)
NY Federal Reserve Bank President is always a member of the FOMC
4 of the other Presidents serve as voting members
These 4 serve on a rotating basis
Five of the 12 district bank presidents serve as voting members of the Federal Open Market Committee

44. FED District Banks

45. How does the FED Meet these Goals?
MONETARY POLICY
Refers to “money” tools of the Federal Reserve to meet these goals
These tools impact the FED Funds Rate:
the % rate banks charge one another

46. 3 Tools of Monetary Policy – Tool #1
Open Market Operations – Most Common Tool
Buying and selling bonds/securities
Selling bonds reduces money supply
Buying bonds increases money supply

47. Tool #1 (cont.) Contractionary Policy Expansionary Policy
Individuals & banks use $ to buy bonds
Increases the FED Funds Rate - Less $ is available for spending and/or lending
Expansionary Policy
Selling bonds increases the $ supply
Decreases the FED Funds Rate

48. Tool #2 Change the DISCOUNT RATE Second most common
It’s the interest rate that the FED charges banks on the money that they borrow
Contractionary: Raising the rate makes it more expensive to borrow money  less $ in economy & increases FED funds rate
Expansionary: Lowering  more $ (opposite effect)

49. Tool #3 Change the RESERVE REQUIREMENT Least Common Tool
% of deposits banks must keep on hand (in reserve) & can’t loan out
Contractionary: Raising % allows banks to lend less $ & increases FED funds rate
Ex. If bank has $10,000 & a reserve requirement of 10% -- it can only lend out $9,000
Expansionary: Lowers % allowing banks to lend more
What if the requirement was changed to 20% - how much of the $10,000 could the bank lend?

50. Summary of Monetary Policy
“Tight” Money – Contractionary
uses tools to decrease money supply  fights inflation
“Loose” Money – Expansionary
uses tools to increase money supply  fights deflation or contraction in the economy

51. Government and Fiscal Policy
Government spending and taxation policies to influence economic activity
Influences business investment and consumer spending

52. Fiscal Policy Goals Growing the economy through: Price Stability
Full Employment

53. Fiscal Policy Tools Taxation & Government Spending
Occurs at federal, state, and local levels
Typically proposed by the executive branch (ex. President) and legislature (ex. Congress) writes a bill to address the action
Bills often have many projects added on to them in order to get it passed & become a law
Many laws have clauses that allow additional taxes/spending without adding new laws

54. Tool #1: Taxation Tax increases Tax decreases
less consumer net income & spending declines
Contractionary Tool
Tax decreases
more consumer net income & spending increases
Expansionary Tool

55. Tool #1: Taxation
Many taxes grow with the economycalled “automatic stabilizers” because they follow the economy
Tax collection increases with inflation in salaries
Tax collection decreases with deflation in salaries
Income Tax is the largest source of tax revenue
Called a Progressive Tax because tax dollars paid increase as salary increases

56. Tool #2: Government Spending
Governments can increase or decrease spending to influence the economy
More spending increases government investment more workers & businesses
Less spending decreases government investment less workers & businesses
Spending can also increase/decrease transfer payments (welfare, social security, etc.)

57. Fiscal Policy
What kind of fiscal tool was the New Deal supposed to be?
Why (in theory) can’t the government keep spending more to keep the economy growing?

58. Debt vs. Deficit
What is the difference between a government budget deficit and government debt?

59. Debt vs. Deficit
Deficits – occur when government spending exceeds its revenue in their annual budget…occurs in one year
Opposite would be a Surplus
Balanced budget occurs when expenses = income
Debt – the compilation of all deficits plus interest owed…grows over many years

60. Government Debt
Why doesn’t the government cut back all its spending so we can get out of debt?
United States Debt

61. Business Cycle Graph
Label the following economic indicators on your graph:
CPI CPI
Unemployment Unemployment
Real GDP Real GDP

62. Business Cycle Graph Activity
On your provided paper
Label Y-Axis as “Real GDP”
Label X-Axis as “Time”
Draw the Business Cycle on your graph as big as possible, but leave room for labels
On the back of the paper write the definitions for peak, trough, contraction, expansion, and recovery

63. Business Cycle Graph Closing discussion questions:
Monetary Policy is the Federal Reserve Bank’s power to increase or decrease the supply of money in the economy. They can do this by increasing or decreasing interest rates.
If the FED is worried about inflation, what would they want to do about the supply of money in the economy?
Would they raise or lower interest rates to do this?

64. Business Cycle Graph Answer these questions:
Why do you think the expansion on your chart is divided between a recovery and prosperity? How do you find the start of prosperity?
How long must a contraction last before it can be considered a recession?

65. Business Cycle Graph
Fiscal Policy is the power of Congress to increase or decrease taxes and increase or decrease government spending.
When the government is worried about inflation should they increase or decrease government spending?
Should they increase or decrease taxation?