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Macroeconomics Unit 4

Macroeconomics Unit 4. What is macroeconomics?. Macroeconomics is the study of the economy as a whole. So – what will we talk about in this unit? Inflation/Deflation Unemployment GDP/GNP Fiscal policy Monetary policy Functions of money ...and probably a lot more stuff!. GDP.

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Macroeconomics Unit 4

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  1. Macroeconomics Unit 4

  2. What is macroeconomics? • Macroeconomics is the study of the economy as a whole. • So – what will we talk about in this unit? • Inflation/Deflation • Unemployment • GDP/GNP • Fiscal policy • Monetary policy • Functions of money • ...and probably a lot more stuff!

  3. GDP • Let the learning commence! • First, let's talk about GDP and GNP... • Gross Domestic Product (GDP): measure of a country's total output • GDP = C + G + I + NX

  4. GDP • So...let the learning commence! • First, let's talk about GDP and GNP... • Gross Domestic Product (GDP): measure of a country's total output • GDP = C + G + I + NX

  5. GDP • Why do we care about the GDP? • GDP is an indicator of how fast an economy is growing. • GDP is calculated quarterly • If a GDP is lower than the last quarter, this signals a recession. • If a GDP is growing to fast it can lead to inflation

  6. What is macroeconomics? • 2012: • Q1 – 5.8% • Q2 – 3.0% • Q3 – 4.9% • Q4 – 1.6% • 2013: • Q1 – 2.8% • Q2 – 3.1% • Q3 – 6.2% • Q4 – 4.2%

  7. GNP • Gross National Product (GNP): GDP, money earned by citizens abroad, less money earned domestically by foreign residents.

  8. Functions of Money What is money?

  9. Functions of Money Money has three forms in our economy. The first is known as... • M1 – cash, medium of exchange. This includes “demand deposits”, or debit and credit transactions.

  10. Functions of Money The second is... • M2: M1 + “near money” • Near money includes savings deposits, money market mutual funds, and other deposits. • M2 can be quickly converted to M1

  11. Functions of Money • The third is... • M3: M2 + corporate investments. • M3 refers to a store of value. • The US Federal Reserve no longer tracks M3.

  12. Hyperinflation Hyperinflation: out of control inflation As central banking authorities increase the money supply, the value of money falls. In some cases this results in hyperinflation. Effects of hyperinflation…

  13. Hyperinflation Germany after WWI Prices quadrupled each month during the 16 months after the war when hyperinflation occurred.

  14. Hyperinflation

  15. Inflation Inflation: the rate of rising prices and falling purchasing power • As inflation rises, each dollar will purchase a smaller percentage of a good.

  16. Hungary after WWII Prices rose 19% PER DAY! Hyperinflation

  17. DEflation Deflation occurs when prices fall. Money is DEvalued Usually caused by reduction in the money supply or available credit.

  18. DEflation Deflation can cause... • Unemployment due to closing factories, lay offs, lack of available credit, lack of demand for goods and services.

  19. Unemployment Unemployment is defined by economists as a condition that occurs when a person actively seeking employment is unable to find employment.

  20. Unemployment Regardless of which school of thought you belong to, it is widely accepted that unemployment is natural and unavoidable.

  21. Unemployment How is the unemployment rate measured? First – the labor force is measured as the amount of people 16 or older who are working or looking for work. So...Here is how the Bureau of Labor Statistics calculates the monthly unemployment numbers.

  22. Unemployment Costs of Unemployment... Individual... ...Society... …...Country... http://www.washingtonpost.com/politics/economic-ups-and-downs-of-the-presidency/2012/09/01/e4c8668c-f47d-11e1-adc6-87dfa8eff430_graphic.html

  23. Fiscal Policy On a separate sheet of paper (and individually), respond to the following scenarios... • The unemployment rate has been steadily increasing for the past 16 months. Deflation is occurring. How might the government adjust fiscal policies to shift the economy?

  24. Fiscal Policy On a separate sheet of paper (and individually), respond to the following scenarios... • Trouble at the Hoover Dam! Two of the walls have been damaged after mutant eagle attacks. The government needs to rebuild the walls very quickly. What are the fiscal policy effects of rebuilding the walls?

  25. Fiscal Policy What is fiscal policy? Fiscal policy is how the government attempts to influence macroeconomic conditions. This is done through taxation and government spending.

  26. Fiscal Policy On a separate sheet of paper (and individually), respond to the following scenarios... • The government has created a jobs program to provide all teenagers with summer employment. This boosts the number of workers in the labor force. What are the fiscal policy ramifications of this action?

  27. Fiscal Policy On a separate sheet of paper (and individually), respond to the following scenarios... • The economy has experienced a severe depression. To combat this the government begins work on a long term technology project. The project will increase government spending and lower the unemployment rate. Describe the positive and negative aspects of this endeavor from a fiscal policy standpoint. • What is the effect of this on the GDP?

  28. Fiscal Policy On a separate sheet of paper (and individually), respond to the following scenarios... • Devise a scenario which would be impacted or created by fiscal policy. Be prepared to share your scenario with the class for discussion.

  29. Monetary Policy What is monetary policy? Monetary policy consists of actions taken by the central banking authority to maintain or change the money supply. This is typically done through interest rates and changing required bank reserves (amt of cash a bank is required to have on hand). The Federal Reserve (The Fed)

  30. Monetary Policy The Fed's Toolbox of Monetary Regulation 1. Reserve Requirements – how much cash a bank must have on hand. (10%) 2. Federal Funds Rate – the rate at which banks lend each other money to meet reserve requirements. 3. Discount Rate – the rate at which banks borrow money from their Fed branch. 4. Discount Window – Allowing banks to borrow money from the Fed.

  31. Monetary Policy On a separate sheet of paper (and individually), respond to the following scenarios... • The Fed has decided to implement a contractionary policy by raising the reserve requirement. How does this monetary policy impact the money supply? • Is this likely to create inflation or deflation?

  32. Monetary Policy On a separate sheet of paper (and individually), respond to the following scenarios... • The Fed is closing the discount window, forcing banks to keep their own reserves or borrow from one another. What impact will this have on the GDP? • Is this likely to cause higher or lower unemployment?

  33. Monetary Policy On a separate sheet of paper (and individually), respond to the following scenarios... • Devise a scenario which would be impacted or created by monetary policy. Be prepared to share your scenario with the class for discussion.

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