ECONOMICS: Macroeconomics Flashcards
economic institutions: banks and financial markets
a. banks: businesses and consumers deposit money into the bank, and then the bank lends out that money to other businesses or consumers, charging interest on loans and paying interest on deposits
b. financial markets: EX. the stock market and money market – people buy shares of public companies (stocks) which help the companies to grow and be productive. profits from a company are then divided among all owners (i.e. shareholders)
- when confidence in the economy is high, consumers buy stock; when it’s low, consumers sell stock for $$
economic institutions: labor unions, corporations, and the government
a. labor unions: unions lead to more satisfied workers who are then more productive.
b. corporations: influences the economy significantly through their operations. large corporations attempt to influence public or gov. policy through lobbying or campaign contributions
c. the government: regulates corporations, unions, and actions in the financial markets to ensure a stable economy
cyclical and structural unemployment
a. cyclical unemployment: occurs as a result of changes in the economy.
- as business cycle peaks, consumer spending is high, workers are needed, and cyclical unemployment is low
- in a recession, consumer spending goes down → less workers needed → layoffs → increase in unemployment
b. structural unemployment: occurs when production requires new skills, technologies, or locations, resulting in job loss for workers whose skills are no longer needed
- inflation and deflation
- cost-push inflation
- demand-shock inflation
- relationship between inflation and unemployment
a. inflation is the rate at which prices rise and deflation is when prices drop
b. cost-push (or supply-shock) inflation occurs when the cost rises for some resource needed for production and no substitute is available.
- EX. oil costs rise → cost to produce the many goods made w/ petroleum rises → the prices for those goods rise → the overall inflation rate rises
c. demand-shock (demand-pull) inflation, occurs when consumer demand grows unexpectedly and producers aren’t prepared to handle the increase
- demand “pulls” prices up as suppliers must purchase more resources and hire more labor
d. high inflation = unemployment is low
- when inflation and unemployment rates are both high, the economy is experiencing a stagflation: a term that reflects a combination of stagnation (no growth) and inflation. production declines and prices rise
the business cycle (expansion, peak, contraction, and trough)
a. economies experience fluctuations in production and growth - typically measured by % changed in GDP
b. the cycle:
1. expansion begins when the economy starts growing. during pds. of expansion, investment rises: stock prices go up, unemployment declines, and consumers purchase more. as demand rise, so do prices and GDP of the nation
2. peak is the transition stage between expansion and contraction, beginning when the economy reaches maximum growth
3. contraction begins after the peak, when the economy begins to experience a slowdown. unemployment rises during this time: consumers save more and spend less, stock prices fall, and the GDP declines
4. trough is the transition stage between contraction and expansion, beginning when the economy hits bottom
fiscal policy
a. refers to gov spending and tax policies to influence economic conditions
b. major areas of gov. revenues: personal income taxes, corporate income taxes, social security taxes and contributions, and excise taxes
c. major areas of gov. expenditures: national defense, gov services, and transfer payments debt interest
d. when revenue is > expenditures → gov. budget = surplus
- can be used to support new or existing gov programs (i.e. new roads, grant money)
e. when expenditures < revenue → deficit
- the gov then borrows $$ to finance the uncovered expenses, increasing the national debt
- in the short term, a deficit tends to increase real GDP and prices
how fiscal policymakers respond to slow economic growth: supply-side and demand-side theories
a. supply-side economic theory focuses on the ways in which the gov can lower barriers to production (i.e. make it easier to supply goods and service)
- EX. reducing taxes - Reagan supported this strategy in the 80s
b. demand-side or Keynesian economic theory is based on the idea that active gov intervention can increase demand, which then drives an increase in production
- EX. stimulus checks puts $$ in people’s pocket
monetary policy
a. monetary policy refers to the ways in which gov influences the availability and cost of money and credit
b. in the US, monetary policy is implemented by the Federal Reserve System, the Fed: an independent gov agency that functions as the central bank of the US
the 4 components of the Fed:
- board of Governors: the board contains 7 members appointed by the president for 14-year terms
- Chairman of the Board: the president selects the Chairman from among the board to serve a 4-year term
- Region Federal Reserve Banks (12, representing distinct districts): each bank has its own board of directors, including members elected by banks in the district and those appointed by the Board for the Fed
- Federal Open Market Committee (FOMC): the 7 members of the Board including the Chairman, the president of the Federal Reserve Bank of NY, and 4 of the presidents from the other Fed banks
- this committee conducts most of the business of the Fed, setting the monetary policy for the country
the responsibilities of the Fed
a. regulating the money supply: the Fed can make loans to increase bank deposits and can influence interest rates to encourage the flow of $$
b. clearing checks (i.e. providing payment to the institution from which the check is drawn)
c. supplying the economy w/ currency: the Fed ensures that coin and paper $$ is available to meet public demand (ex. making sure a bank has enough cash on hand to give an individual making a withdrawal)
d. conducting gov banking business: the gov has a bank account w/ the Fed, which holds deposits, keeps track of gov debts, and pays gov bills
e. supervising banks that are members of the Federal Reserve System
the 3 tools the Fed uses to control monetary policy:
- bank reserve requirements
- open market operations
- discount window lending
a. bank reserve requirements: banks are required by the Fed to hold a certain amt of $$ held by the bank in the vault. raising the reserve rate results in a decrease in the amount of $$ a bank can loan
- EX. if the rate reserve is 10%, the bank can loan 90% of its money. if the rate increases to 15%, the bank can only loan 85%
b. open-market operations: the Fed is responsible for the purchase or sale of gov securities. purchases by the Fed result in the banking system having more funds to lend, lowered interest rates, and a boost to the economy
- sales by the Fed result in interest rates rising, inflation declining, and economic growth slowing
c. discount window lending: the discount rate is the interest rate the Fed uses when lending to commercial banks. when the discount rate is raised, the bank must spend more→ less money to loan
- as a result, economic growth slows, and inflation is held in check
- when the economy is weak, the discount rate is lowered to encourage growth
gov regulations to ensure economic growth:
a. stock exchanges: bc investments in stock can lose value, the Securities and Exchange Commission maintains strict rules for trading and takes action against those who violate them
b. business practices: the federal trade commission maintains regulations to ensure businesses treat consumers fairly and don’t engage in unfair competition
c. labor relations: the national labor relations board regulates to protect workers, ensuring fair pay and treatment
d. employment practices: the equal employment opportunity commission investigates charges of discrimination
e. the environment: the EPA develops regulations to ensure environmental justice
f. food and drugs: food and drug admin
g. product safety: consumer product safety commission
h. communications: the federal communications commission
international economics
a. foreign trade is a key component of international economics
b. a nation has an absolute advantage if it has a greater rate of production than others despite access to the same resources
c. its more economically efficient for nations to specialize where they have the greatest relative advantage and to trade for certain goods/services produced by others in which the opportunity cost is lower
what the gov uses to encourage and discourage trade:
a. tariffs, which increase revenue to the gov but raise prices for the consumer
b. import quotas (i.e. restrictions on the # of imports allowed), often lead to an increase in prices for the consumer
c. barriers to importing or exporting. this can include health and safety regulations (ex. concerns about mad cow disease could ban imports on meat from countries where the disease is prevalent)
d. export subsidies (i.e. payment by the gov to exporters), encourages an increase in exported goods from specific suppliers
within the system of international trade, the economic development of a nation is affected by:
a. specialization: when a country specializes in the production of one or a few commodities, opportunity cost is lower and supply increases for the commodities
- increased in supply → decrease in price for the consumer
b. import substitution: replacing some imports w/ locally produced goods can increase national employment, encourage innovation, and reduce dependency on other countries
c. export development: increasing exports can lead to an increase in national employment and income
d. cartelization: a cartel is an agreement by several countries to set prices, quotas, or divide profits. when a cartel controls the production and sale of a commodity, free trade is restricted and competing suppliers may be driven out of business
