Chapter 1 Parks Economics 104

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Chapter 1

Parks Economics 104


Introduction to the U.S. Economy

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What is Macroeconomics?


Macroeconomics

is the study of the aggregate
economy.


It addresses the nature of and causes of the
business
cycle
: waves of output growth and job creation,
followed by periods of output contraction and
rising unemployment.


It deals with broad issues like


unemployment


inflation


economic growth


budget deficits and trade deficits

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Unemployment


The
unemployment rate

is the percentage of the
labor force that is unemployed.


Given the U.S. labor force of approximately 150
million people, a one percentage point increase in
the unemployment rate implies that an additional
1.5 million workers are unemployed.


Thought question:


What is the unemployment rate that the economy
“should” have? Is it zero?

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Inflation


Inflation

is a sustained increase in the overall
price level.


Economists measure inflation as the percentage
change in a particular bundle of goods and services.


Thought questions:


How much inflation is too much?


What is
deflation
?

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Economic Growth


Economic growth

results from an increase in
production from the economy over a particular
period of time.


Thought questions:


How fast should the economy be growing each
year?


Can the economy grow too fast?

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Budget Deficits


A
budget deficit

is the difference between
government outlays and tax receipts.


Deficits result when the government spends more
than it collects in taxes, while surpluses result when
tax revenues exceed outlays.


Thought questions:


What is the difference between a budget deficit and
the national debt?


Why are large budget deficits harmful?

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Trade Deficits


A
trade deficit

occurs when a nation imports
more goods & services than it exports.


The U.S. has run trade deficits every year since the
early 1980s.


Thought questions:


How does the U.S. “finance” the purchase of the
surplus imports?


What impact does the trade deficit have on the
value of a nation’s currency?

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Stabilization Policy


One of the primary goals of macroeconomics is
to stabilize the business cycle.


That is, reduce the fluctuations in output (and
inflation) over time.


Policy makers have two broad tools to help
stabilize the economy:


Fiscal Policy


Monetary Policy

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Fiscal Policy


Fiscal policy

is the (federal) government’s
manipulation of the budget to attempt to
stabilize the nation’s level of output.


The “tools” of fiscal policy include:


changing taxes and transfers


changing the level of government spending


Thought question:


Why in early 2003 did President Bush push
through a new tax cut?

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Monetary Policy


Monetary policy

is the central bank’s (Federal
Reserve) manipulation of the money supply
and/or interest rates to attempt to stabilize the
nation’s level of output.


By lowering interest rates, the central bank hopes
to spur additional investment and consumption.


Thought question:


What is the
federal funds rate
? the
discount rate
?

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Superb Economic Sites on the Net


The

Bureau of Labor Statistics

publishes some of the
major economic indicators on their Economy at a Glance
web page.


The
Bureau of Economic Analysis

contains up
-
to
-
date
figures on the nation's output and income.


The
Dismal Scientist

is an excellent web site giving daily
updates and analysis of economic information.


The
St. Louis Federal Reserve Bank

also has excellent
time series of the major macroeconomic data. Look for
FRED II (Federal Reserve Economic Data).


ECONOMAGIC.COM

is a great site for economic data.

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Take the quiz…


Where is the U.S. economy now?


Refer to the Chapter 1 quiz questions.


How many can you answer correctly?


http://economagic.com



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Terms


unemployment


recession/boom


inflation




fiscal policy


GDP and GNP


economic growth


Personal Income


Investment


Disposable Income


trade deficit


money




monetary policy


budget deficit



national debt