Macroeconomics Final Review
Macroeconomics Final Review Economics 111
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This 4 page Study Guide was uploaded by amber weiss on Wednesday April 27, 2016. The Study Guide belongs to Economics 111 at Southern Illinois University Edwardsville taught by Mary Anne Pettit in Spring 2016. Since its upload, it has received 39 views. For similar materials see Macroeconomics in Economcs at Southern Illinois University Edwardsville.
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Date Created: 04/27/16
Macroeconomics Final Review Unemployment, Education and Earnings - Calculating the National Unemployment Rate [Entire Macro-economy] 1. Employed Any work for pay during the survey week or on vacation, sick, bad weather, or strike 2. Unemployed Did not work for pay and are actively looking for work in last 4 weeks 3. Not in the labor force Did not work for pay and are not actively looking for work - What is the labor force? Employed + unemployed - National unemployment rate Data from household survey utilized Unemployment rate: the % of labor force defined as unemployed Current rate: [5.0% March 2016] [*** 5.9% September 2014] ***** Big Deal: landmark for economy ; 1 time below 6% since July 2008 How low should unemployment be? Should we aim for “0” unemployment? - Full Employment Unemployment rate is about 5-6% - AKA National Rate of Unemployment = 5-6% Types of Unemployment 1) Frictional Unemployment (movement) Those just entering the workforce or changing jobs 2) Structural Unemployment Those without marketable skills= highschool dropouts, gaps from prison records, drug issues they will struggle even when economy is booming 3) Cyclical Unemployment Those unemployment in a recession- (traditionally) Natural unemployment Rate (5-6%) - AKA full-employment unemployment - Frictional + structure = natural rate - Just know the trend: and that the unemployment rate is going down (fall of 2014) - Why did unemployment rate remain so high? Because we keep searching for something better, we do not take the first job that falls into our laps Issues with Unemployment Measure 1. Part-Time Work 2. Discouraged Workers - we know when economy is good there are fewer - We know when economy is bad there are more 3. Rate is National, over-all figure - detailed look at rate is available by: + By educational attainment- EDUCATION MATTERS A LOT + by geographic data- WHERE WE LIVE MATTERS TOO + by Gender Geography and Unemployment - States with highest unemployment a. Alaska 6.6% b. West Virginia 6.5 c. Mississippi 6.5 d. District of Columbia 6.5 - States with lowest unemployment a) New Hampshire 2.7 b) South Dakota 2.7 c) North Dakota 2.9 d) Colorado 3.0 e) Nebraska 3.0 f) Hawaii 3.1 Who is rich? - Wealth= networth: value of stuff – debt Assets – liabilities Functions of Money - Medium of exchange: something to use in day to day transactions avoid barter; exchange without the use of money requirement of coincidence of wants - Standard of Value: way of measuring value - Store Value Common characteristics of items used as money in the past - Commodity money: an item that has value their than as a medium of exchange - Characteristics in common- all types of money Acceptable Relatively scarce Divisible Portable Money today (monitary aggregate) - M1- the most narrow definition of money supply - M1- currency + checkable deposits - Currency= coins and paper money - M2- M1 + savings deposits and time deposits - Near Moneys: highly liquid financial assets that can be easily converted into currency or checkable deposits. Close to what you pay for What gives money value? 1. Acceptability 2. Relative Scarcity 3. Legal Tender Characteristics of Fed Reserve System 1. Central Bank 2. Quasi-Public Banks 3. Banker’s Banks Federal Reserve System - Creates board of governors - 7 members - Appointed my president and congress - 14 year term - Current chair: Janet Yellen Federal Open Market Committee (FOMC) - Responsible for a key tool- open market operations - 7 members of board and 5 district federal bank presidents (12 members) Functions of the Fed System I. Holds deposits of commercial banks (reserves) II. Assist in check clearing process III. Act as fiscal agents for Fed Govt. IV. Supervise commercial banks V. Regulate the money supply Monetary Policy - Holding and reserves and controlling the money supply - Monetary policy- the manipulation of money supply to achieve [price stability, full-employment, economic growth= economic goals] Fiscal Policy - The manipulation of government spending and taxes to achieve… the economic goals How does Monetary Policy Work? - Fractional reserve banking: banks required to hold only a fraction of assets as reserves This allows banks to increase the money supply by making loans More loans= more money Fewer loans= less money Loans create purchasing power MORE RESERVES = MORE LOANS= MORE MONEY LESS RESERVES= FEWER LOANS= LESS MONEY - Required reserves: the amount of funds equal to a specified percentage of the banks demand deposit liabilities - Reserves: must be kept on deposit with FED district bank or as cash in vault Expansionary Monetary Policy (aka Easy money, lose money) - Used to stimulate a sluggish or recessionary economy - Increase spending ----- increase spend increase gdp - How does this type work? Increase reserves= more loans Increase money supply= lower interest rates This is INVESTMENT spending Restrictive or Tight Monetary Policy - Used to discourage spending - Demand-pull inflation occurs when the economy attempts to spend beyond its capacity to produce- too much money chasing after to few goods - Inflation always caused by too much mney (too many loans) - Decreased reserves= fewer loans - Decrease money supply= increase interest rates - Higher interest rates= less spending (investment spending) Main tool of Monetary Policy - Open market operations- Fed buys and sells the Govt. securities (commercial) banks are holding to move reserves in and out of bank system [ FOMC controls] Federal funds rate - The interest rate banks charge each other to borrow reserves- FED DOES NOT SET THIS RATE but does “target” changes in rate through open market operations Expansionary open market operations - Fed initiates a purchase of govt. securities (bonds) from commercial banks. Banks give up bonds and gain reserves exchange - More reserves= more money= lower targeted Fed funds rate Another tool of monetary policy - Discount rate- interest rate the Fed charges banks for temporary loans to meet the reserve requirement. Fed does set this rate Restrictive Open Market Operations - Restrictive= inflation - Fed initiates a sale of govt securities - Bonds to commercial banks. Banks gain bonds and give up reserves in exchange - Less reserve= less money= higher targeted Fed funds rate Fiscal policy - Fiscal policy: manipulation of govt. spending and taxes - Who makes fiscal policy? President and Congress Monetary policy - Federal Govt. (central banks) FOMC - Manipulative policy: the manipulation of money supply to achieve the economic goals How is fiscal policy used? - Recession/ slow growth (traditional) Increase government spending Decrease taxes Both in these directions Increase deficit- deficit spending Inflation/Rapid Gdp growth - Traditional fiscal policy - Decrease government - Increase taxes - Both, in these directions - Causing a budget surplus
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