Week 13 - Intro to Macro Flashcards

Question

Proof that productivity has grown over time in the US

Answer 1

1950 - 1973: Productivity increased more than 2% per year due to post-war industrial expansion, automation, and workforce development 1974 - 1995: Growth slowed to around 1% per year, partly due to economic stagnation, oil crises, and slower technological breakthroughs 1996 - 2007: Productivity rebounded to between 1% and 2% per year, driven by the rise of computers, the internet, and improved business processes

Answer 2

The business cycle refers to the natural rise and fall of economic activity over time These fluctuations are short-term and can be seen in changes to GDP (Gross Domestic Product) and other economic variables

Answer 3

1. Expansion (recovery) 2. Recession (contraction) 3. Depression

Answer 4

A period where the economy grows at a rate above normal During an expansion, GDP increases, unemployment falls, and consumer spending and business investment rise

Answer 5

A period where the economy grows at a rate significantly below normal or even shrinks

Answer 6

A severe recession that lasts for a long period (usually years) A depression is marked by an extremely prolonged contraction in economic activity, deep unemployment, and widespread economic hardship

Answer 7

1. Rising economic output 2. Lower unemployment 3. Higher consumer confidence and spending

Answer 8

It ends when the economy starts to overheat, potentially leading to inflation and unsustainable growth

Answer 9

1. Two consecutive quarters of negative GDP growth (a key indicator of recession) 2. Lower consumer spending, higher unemployment, and reduced business investment 3. Even if GDP growth isn't negative, it may still be significantly lower than expected

Answer 10

A recession often leads to a decline in production, increased layoffs, and reduced income levels.

Answer 11

x-axis: Time y-axis: Real GDP sloping line -> long run trend rate of real GDP line curving above trend line: economic boom line curving downwards: economic downturn line below the trend line curving back up: economic recovery

Answer 12

between 5-7 years

Answer 13

economic expansion typically lasts longer

Answer 14

a crucial economic indicator that measures the percentage of the labor force that is actively seeking work but is unable to find a job It's often used to gauge the health of the labor market and can tell us a lot about the overall state of the economy

Answer 15

rises during recessions falls during expansions

Answer 16

The total number of employed and unemployed people who are either working or actively looking for work.

Answer 17

High unemployment usually indicates economic struggles, while low unemployment signals economic growth and job creation

Answer 18

The inflation rate measures the annual percentage change in the general level of prices for goods and services in an economy It indicates how much the prices of everyday goods and services are increasing or decreasing over a set period, typically a year

Answer 19

Caused by economic downturns. When the economy contracts, businesses lay off workers, leading to an increase in cyclical unemployment.

Answer 20

Inflation erodes the purchasing power of money. This means that as prices rise, the same amount of money buys fewer goods and services. People with fixed incomes (like retirees who rely on pensions or savings) are especially affected because their income doesn’t increase with inflation. As a result, they can buy less with the same amount of money.

Answer 21

As inflation increases, the value of money decreases. For example, if the inflation rate is 5%, a good or service that costs $100 today will cost $105 next year, assuming prices rise at the same rate. Purchasing power refers to the amount of goods and services that money can buy. As inflation rises, individuals' ability to purchase the same quantity of goods and services diminishes unless their income rises at the same rate.

Answer 22

a sustained decrease in the general price level of goods and services in an economy over time. It is the opposite of inflation and results in an increase in the purchasing power of money.

Answer 23

1. Post-Pandemic Surge in Consumer Demand: After COVID-19 lockdowns, there was a sharp increase in consumer spending as economies reopened. Many people had extra savings from government stimulus programs and fewer spending opportunities during the pandemic. Demand for goods (cars, electronics, furniture) surged beyond normal levels, putting pressure on prices. 2. Supply Chain Disruptions: The pandemic caused global supply chain bottlenecks, leading to shortages of raw materials, shipping delays, and higher transportation costs. Companies struggled to produce and deliver goods quickly enough to meet demand, contributing to price increases. 3. War in Ukraine (2022-Present): The war disrupted global food and energy markets, causing oil, natural gas, and grain prices to rise. Higher energy prices increased production and transportation costs, leading to broader inflation across multiple sectors. 4. Rising Service Sector Inflation Risks: While goods inflation has been high, service sector inflation could become a bigger concern. If the supply of services (such as healthcare, hospitality, and transportation) fails to keep up with demand, wages and prices in these sectors could continue rising. This could create persistent inflationary pressures in the economy. 5. Comparing Inflation to the 1970s: 1970s Inflation: Driven by oil shocks (OPEC oil embargo), high government spending, and weak monetary policy. Inflation peaked at over 14% in the U.S. in 1980. 2020s Inflation: Driven by pandemic-related supply-demand imbalances and the Ukraine war, but central banks are taking aggressive measures to control it. Inflation has been high, but it is lower than 1970s levels.

Answer 24

Trade plays a crucial role in the global economy, but it also creates political and economic challenges. Some key issues include its impact on jobs, trade agreements, and trade imbalances.

Answer 25

International trade creates and destroys jobs in different industries

Answer 26

The steel and textile industries in some countries have suffered job losses due to competition from cheaper foreign imports. At the same time, technology and service-based industries may gain jobs as demand grows internationally.

Answer 27

Countries form agreements to reduce trade barriers (tariffs, quotas, etc.) and promote economic cooperation Examples: NAFTA (now USMCA), European Union (EU), and WTO agreements.

Answer 28

A country’s trade balance is determined by the difference between its exports and imports. Exports: Goods and services sold to other countries. Imports: Goods and services purchased from other countries.

Answer 29

Exports < Imports (a country buys more than it sells). Example: The U.S. runs a trade deficit because it imports more than it exports.

Answer 30

Exports > Imports (a country sells more than it buys). Example: China and Germany often run trade surpluses.

Answer 31

monetary policy and fiscal policy

Answer 32

involves controlling a nation’s money supply and interest rates to influence economic activity

Answer 33

U.S. - Federal Reserve System (Fed) Eurozone - European Central Bank (ECB) U.K. - Bank of England

Answer 34

Inject More Money: Central banks can increase the money supply by lowering interest rates, making borrowing cheaper to stimulate spending and investment. Remove Money: Central banks can reduce the money supply by raising interest rates, slowing down borrowing and inflation.

Answer 35

Control inflation (keep prices stable). Manage economic growth and employment. Stabilise the financial system.

Answer 36

Fiscal policy involves government decisions on spending and taxation to influence the economy.

Answer 37

Governments (through budgets, taxes, and public spending)

Answer 38

Government Spending: Investments in infrastructure, defence, healthcare, education, etc. Taxation: Income tax, corporate tax, VAT, etc.

Answer 39

Deficit: Government spending exceeds tax revenue → often financed by borrowing. G>T

Answer 40

Surplus: Government spending is less than tax revenue → reduces debt or allows for future investments. G

Answer 41

Stimulate the economy during downturns (increase spending, lower taxes). Reduce inflation or debt during booms (decrease spending, raise taxes).

Answer 42

Both policies act as short-run stabilisation tools. In a recession, governments may increase spending (fiscal policy) and central banks may lower interest rates (monetary policy) to boost demand. In high inflation periods, central banks may raise interest rates, while governments may cut spending or raise taxes to cool down the economy.

Answer 43

focus on long-term changes in a country's economy rather than short-term stabilisation. These policies reshape economic institutions to promote growth, efficiency, and stability over time.

Answer 44

Government actions aimed at changing the fundamental structure of the economy. Unlike monetary and fiscal policy, which respond to short-term economic fluctuations, structural policies focus on long-term improvements. Structural reforms can increase productivity, enhance competitiveness, and promote economic stability.

Answer 45

1. Tax Reforms: Simplifying or adjusting tax systems to encourage investment and economic efficiency. Example: Lowering corporate taxes to attract businesses. 2. Deregulation: Reducing unnecessary government rules to encourage entrepreneurship and innovation. Example: Relaxing restrictions on businesses to improve competition. 3. Strengthening the Financial Sector: Ensuring that banks and financial institutions operate efficiently and safely. Example: Preventing financial crises by enforcing sound lending practices. 4. Privatisation: Transferring government-owned industries to the private sector to increase efficiency. Example: Selling state-owned enterprises in industries like energy, telecommunications, or transportation. 5. Social Safety Nets: Implementing programs like unemployment benefits, pensions, and healthcare to protect vulnerable populations. 6. Setting a Minimum Wage: Establishing wage floors to prevent exploitation and ensure fair pay for workers. 7. Improving Public Institutions: Strengthening legal systems, property rights, and governance to enhance economic stability.

Answer 46

Structural policies may enhance the effectiveness of many stabilisation measures: 1. Promoting Competition → Lower Prices → Lower Inflation. 2. Improving Labor Markets → Higher Employment → Economic Growth. 3. Strengthening Financial Institutions → Preventing Crises → Economic Stability. Structural policies complement fiscal and monetary policies by making stabilisation efforts more effective in the long run.

Answer 47

A liquidity trap occurs when interest rates are very low, but people and businesses still don’t want to borrow or spend. This makes monetary policy (such as cutting interest rates) ineffective in stimulating economic growth.

Answer 48

focuses on what is happening or what will happen (objective and fact based) Examines the economic consequences of policies or events without judgment on whether they are good or bad. Testable – Can be supported or refuted using data and evidence.

Answer 49

Focuses on what should be done (opinion based/ value driven) Involves value judgments, ethics, and personal opinions about policies. Not testable – Based on perspectives rather than measurable facts.

Answer 50

"Raising the minimum wage will increase labor costs for businesses." "A decrease in interest rates leads to an increase in investment." "A higher budget deficit will lead to increased national debt."

Answer 51

"The government should raise the minimum wage to reduce income inequality." "The central bank should not cut interest rates because it might cause inflation." "A trade surplus is better than a trade deficit because it creates jobs."

Answer 52

Aggregation is the process of adding up individual economic variables to get an economy-wide total. This helps economists analyse overall economic trends and make policy decisions.

Answer 53

Gives a “Bird’s-Eye View” of the Economy: Instead of focusing on millions of individual transactions, aggregation helps economists see broad trends Example: Instead of tracking every worker’s income, we look at national income (GDP). Allows for Comparisons: Aggregate data in money values makes it easier to compare different economic activities. Example: Total exports vs. total imports helps measure trade balance. Used in Policy Decisions: Governments and central banks rely on aggregated data to make policy choices. Example: A rising unemployment rate may lead to job-creation policies.

Answer 54

compare broad categories of goods and services, such as exports and imports

Answer 55

Crime Rates – Instead of analyzing every crime case, we use an overall crime rate to see trends in public safety. Unemployment Rates – Rather than tracking each individual job seeker, we look at the national unemployment rate to measure job market health. Output per Worker (Productivity) – Instead of measuring every worker’s contribution, we calculate average output per worker to assess productivity

Answer 56

The Great Depression (1929–1939) was the most severe economic downturn in modern history. It caused massive job losses, factory closures, financial collapse, and long-term economic suffering.

Answer 57

Factories cut production by 31% – Demand for goods collapsed, leading to mass layoffs. Unemployment tripled – By 1933, 25% of the workforce was jobless. Stock market crashed – The market lost one-third of its value in just three weeks.

Answer 58

Unemployment soared – Nearly a third of workers lost their jobs. Banking system collapsed – Banks failed as people withdrew money in panic.

Answer 59

Stock Market Crash (1929) – Triggered panic, but was not the sole cause. Bank Failures – People rushed to withdraw savings, causing banks to collapse. Falling Demand & Business Closures – Lack of spending led to lower production. Poor Economic Planning – Governments initially did too little to stabilise the economy. Weak Global Economy – High war debts (from World War I) and economic instability worsened the crisis.

Answer 60

Macroeconomic policies: Government Action – New policies aimed at stabilizing the economy. U.S. New Deal (1933–1939) – Massive government spending programs to create jobs Banking Reforms – Deposit insurance and regulations to prevent bank failures. Monetary & Fiscal Policy Changes – The Federal Reserve adjusted money supply, and the government increased spending.

Answer 61

1. Illusion of unlimited growth 2. Stock market speculation 3. Consumerism and excessive spending 4. Weak and unregulated banking institutions 5. Overproduction of goods 6. Decline of the farming industry 7. Unequal distribution of wealth 8. US lending to European allies 9. Unstable international banking system

Answer 62

During the 1920s, many Americans believed that the U.S. was a place of unlimited growth, opportunity, and achievement. Americans were earning more money than ever – national income rose from $61 billion to $87 billion. Many economic analysts and business executives felt that the stock market was the key to prosperity and urged American citizens to invest as much as possible Consumerism: spending more money than they were saving

Answer 63

emerged as a major innovation that shaped consumer behaviour. To get around this difficulty, the 1920s produced another innovation—“credit,” an attractive name for consumer debt. People were allowed to “buy now, pay later”.

Answer 64

This only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines. By 1929, the weight of rising debt and the inability to continue spending led to consumer exhaustion. This contributed to the stock market crash and the beginning of the Great Depression. Credit Crisis: As debt levels became unmanageable, people could no longer continue borrowing and spending at the same pace. This led to a sharp contraction in consumer demand, which affected production and jobs, leading to widespread unemployment and financial collapse.

Answer 65

The stock market crash of October 28, 1929, and the subsequent Black Tuesday (October 29, 1929), marked the beginning of the Great Depression. However, the seeds of economic collapse had already been sown in the preceding months. The depression was a prolonged economic downturn that affected not only the U.S. but also the entire world.

Answer 66

October 28, 1929: Investors rushed to sell their stocks, and this panic selling caused stock prices to plummet. Over $4 billion was lost in a single day. Black Tuesday (October 29, 1929): The stock market saw massive sell-offs, and investors were left with heavy losses. This was a critical moment that officially marked the beginning of the Great Depression. Stock Market Collapse: Stocks were sold off at any price, causing a rapid loss in wealth and shaking confidence in the economy. This crash was the signal of a broader economic crisis.

Answer 67

While the stock market crash in October 1929 was a major turning point, the economic issues that contributed to the collapse had been brewing for months, if not years. By the summer of 1929, the economy was already showing signs of weakness. Exhaustion of Credit: Many Americans had already taken on substantial debt, and by this time, they had exhausted their available credit. Consumers were now focused on paying off past purchases instead of making new ones. Stagnant Consumer Spending: Because people were spending much of their current income on old debts rather than purchasing new goods, consumer demand sharply declined. This created an unsustainable economic situation where businesses couldn't sell their products.

Answer 68

Overproduction & Unsold Inventory: As people could no longer afford to buy products, businesses began to face overproduction. Goods piled up in warehouses as companies struggled to sell their stock. Unmet Consumer Demand: Unsold goods, coupled with rising unemployment and decreasing wages, meant that businesses had to cut back production. This worsened the economic situation and led to even more factory closures.

Answer 69

Stock Prices Continued to Decline: Even after the initial crash in October 1929, stock prices continued to fall. By late 1932, stock prices had shrunk to just about 20% of their value from before the crash. Widespread Factory Closures: With little consumer demand, factories were forced to close. By the early 1930s, many industries were producing far below their capacity, and hundreds of factories and mills shut down. Manufacturing Output Decline: The output of American manufacturing plants was cut in half from 1929 to 1932. This decline in production caused a ripple effect across the economy, leading to massive unemployment and widespread economic hardship.

Answer 70

Shift in Public Sentiment: The optimistic, confident attitudes that had defined the 1920s gave way to a mood of defeat and despair. People began to realize that the economic situation wasn't just a temporary setback—it was a long-term, systemic crisis. Desperation: As job losses soared, people struggled to survive. The poverty rate reached new highs, and communities faced unprecedented levels of homelessness and hunger

Answer 71

By 1932, the U.S. economy was at its lowest point, and there were few signs of recovery. In fact, many economists and political leaders feared the crisis would continue indefinitely. The Great Depression became a global crisis, affecting countries around the world. International trade plummeted, and nations struggled to keep their economies afloat.

Answer 72

Unemployment Rate: The unemployment rate skyrocketed during the Great Depression, from about 3.2% in 1929 to a staggering 24.9% by 1933. This meant that more than 15 million Americans were out of work, struggling to survive in a rapidly collapsing economy. The job losses were devastating to families, with many people unable to afford basic necessities. Industrial and Agricultural Impact: Unemployment affected various sectors: Factories and businesses closed down due to falling demand. Farmers were already struggling in the 1920s, and the depression worsened their plight with low crop prices and debt. Widespread Poverty: Unemployment led to poverty on an unprecedented scale. Homelessness increased, and millions of families lost their homes and livelihoods.

Answer 73

Loans and Bank Investments: Many banks had made loans to businesses and individuals who were now unable to repay. Additionally, some banks had invested heavily in the stock market, and the crash left them with massive losses. Bank Runs: As news spread about the bank failures, people became anxious and rushed to withdraw their savings. This led to a bank run, where many people demanded their money all at once. However, most banks only held a small fraction of their deposits in cash, meaning they couldn’t pay everyone. Panic: The fear of losing savings caused a chain reaction, as people saw their neighbors withdrawing money and panicked about their own financial security. This caused even more banks to fail. Bank Failures: By the winter of 1932-1933, the situation reached a breaking point. Over 5,000 banks failed by March 1933. As a result, millions of Americans lost their life savings, causing widespread financial devastation.

Answer 74

Loss of Trust: The bank closures severely undermined public confidence in the banking system. People were no longer sure they could trust their banks to keep their money safe. Economic Impact: Bank closures disrupted the flow of credit, which further hurt the economy. Businesses that had relied on loans to expand or maintain operations could no longer access credit, leading to more closures and job losses. Savings Wiped Out: For many families, the money they had saved up over a lifetime was lost. The failure of these banks had a long-lasting psychological effect on people, as their economic stability was suddenly shattered.

Answer 75

Homeless people built shacks and formed shantytowns, which were called “Hoovervilles” out of bitterness toward President Herbert Hoover, who refused to provide government aid to the unemployed. As people lost their jobs and savings, mortgages on many homes and farms were foreclosed.

Answer 76

1. Contraction in the money supply 2. Large increase in tariffs 3. Huge tax increases in 1932 and 1936 (implemented in order to balance the budget) 4. Price controls, perverse regulations, and constant policy changes during the new deal era

Answer 77

The initial monetary contraction, during 1929-1933, plunged the economy into a recession. The Fed raised interest rates to limit speculation in the stock markets while also attempting to prevent the devaluation of the dollar during the gold standard era.

Answer 78

During this period, there was a reduction in the money supply and a decline in asset prices. This tightening of credit led to an environment where people began to expect lower wages and lower prices in the future. Even though nominal interest rates were low, individuals and businesses avoided borrowing during this contraction. This was because they feared that, with wages and profits declining, they would not be able to meet future loan repayments. As businesses and consumers curtailed their borrowing and spending, the economy entered a vicious cycle: the reduction in spending led to even more job losses, lower incomes, and further cuts in demand for goods and services.

Answer 79

Traditional Economic Thought: Before the Keynesian Revolution, it was widely accepted that the federal budget should be balanced. This meant that the government aimed to keep its spending and revenue levels equal, avoiding large deficits. In an effort to reduce the federal budget deficit, Hoover's administration raised taxes during the Depression, hoping to curb the deficit and stabilise the economy. However, these tax increases further depressed consumer and business spending, making the situation worse. Roosevelt, like Hoover, raised taxes to help balance the budget. However, this also slowed down the recovery, as it reduced disposable income and consumer spending. Demand Stimulus: Keynesian economists argued that the government should increase spending to boost demand for goods and services, even if it meant running budget deficits. Prior to World War II, many Keynesians felt that the deficits during the Great Depression, while they were necessary, were still too small to create sufficient demand stimulus.

Answer 80

Worldwide collapse of the economy. Many people became ill. Many people were homeless and jobless. Savings accounts were wiped and most banks closed due to bankruptcy.

Answer 81

The Great Depression served as a lesson for all and showed the importance of the role of government in the economy. The government should aid businesses with more programs to avoid problems in the economy. Raising taxes during a recession will reduce output and make matters worse. The central bank should closely monitor the money supply since one of the causes of the Great Depression was the contraction of money by the Federal Reserve. Economists, as well as policy makers, should carefully study the economy to avoid another economic downturn. Good intentions are no substitute for sound policies. Policy makers actions during the 1930s turned what have been a recession into the Great Depression.

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Week 13 - Intro to Macro Flashcards

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