Chapter 1 Parks Economics 104

© OnlineTexts.com p.
1

Chapter 1

Parks Economics 104


Introduction to the U.S. Economy

© OnlineTexts.com p.
2

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

© OnlineTexts.com p.
3

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?

© OnlineTexts.com p.
4

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
?

© OnlineTexts.com p.
5

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?

© OnlineTexts.com p.
6

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?

© OnlineTexts.com p.
7

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?

© OnlineTexts.com p.
8

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

© OnlineTexts.com p.
9

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?

© OnlineTexts.com p.
10

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
?

© OnlineTexts.com p.
11

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.

© OnlineTexts.com p.
12

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



© OnlineTexts.com p.
13

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