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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
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