MAC- Macroeconomics Overview

Macroeconomics

Introduction

Macroeconomics looks at a nation’s entire economy. Economic indicators like real GDP, unemployment rate, and inflation rate show how the economy is doing over time. They help us understand how healthy our economy is in comparison to previous years and other countries. Depending on the movement of these indicators, we can identify whether the economy is expanding or contracting, and the government can attempt to stabilize the economy using fiscal and monetary policy. The Federal Reserve is the central banking system of the United States and it works by controlling the nation’s money supply. Congress uses fiscal policy whenever it passes legislation about taxes and government spending.

Learning Objectives

In this module, students should be able to:

  1. Explain how to measure the nations’ economic activity.
  2. Use the economic indicators to describe the stages of the business cycle.
  3. Describe the organization of the Federal Reserve System and its roles in payment processing, bank supervision, and monetary policy.
  4. Describe how the Federal Reserve uses monetary policy to influence interest rates and accomplish the dual mandate of price stability and full employment.
  5. Explain the effect on the economy of the government’s taxing and spending decisions to promote price stability, full employment, and economic growth.

Key Terms

The following key terms will help you understand the content in this module.

  • Gross Domestic Product (GDP) – the total value of all final goods and services produced in a particular economy
  • Real GDP – GDP expressed in constant, or unchanging, prices.
  • Full employment – the level of employment reached when there is no cyclical unemployment
  • Unemployment rate – the percentage of the nation’s labor force that is unemployed
  • Inflation – General rise in prices
  • Consumer Price Index (CPI) – A price index determined by measuring the typical “market basket” of a typical consumer
  • Business cycle – A period of macroeconomic expansion followed by a period of economic contraction
  • Recovery/expansion – a period of economic growth as measured by a rise in real GDP
  • Peak – the height of an economic expansion, when real GDP stops rising
  • Contraction – period of economic decline marked by falling real GDP
  • Recession – A prolonged economic contraction
  • Trough – the lowest point in an economic contraction, when real GDP stops falling
  • Frictional unemployment – unemployment that occurs when people take time to find a job
  • Seasonal unemployment – unemployment that occurs as a result of harvest schedule or vacations, or when industries slow or shut down for a season
  • Structural unemployment – unemployment that occurs when workers’ skills do not match the jobs that are available
  • Cyclical unemployment – Unemployment that rises during economic downturns and falls when the economy improves
  • Fiscal policy – the use of government spending and taxing to influence the economy
  • Proportional tax – Everyone pays the same percentage of income; example: flat tax
  • Regressive tax – the percentage of income paid in taxes decreases as income increases; example: sales tax
  • Progressive tax – the percentage of income paid in taxes increases as income increases; example: income tax
  • Income tax – a tax on a person’s earnings
  • Sales tax – a regressive tax on the dollar value of a good or service being sold
  • Property tax – a tax on the value of your property
  • Capital gains tax – a tax on the financial gains made by selling stock
  • Estate tax – a tax on the estate, or total value of the money and property, of a person who has died
  • Budget surplus – the government takes in more money than it spends
  • Budget deficit – the government spends more money than it takes in
  • National debt – all the money the federal government owes to bondholders
  • Money – anything that serves as a medium of exchange, a unit of account, and a store of value
  • Medium of exchange – anything that is used to determine value during the exchange of goods and services
  • Unit of account – a means for comparing the values of goods and services
  • Store of value – something that keeps its value if it is stored rather than used
  • Monetary policy – the actions the Federal Reserve takes to control the nation’s money supply, real GDP and inflation rate
  • Federal Open Market Committee (FOMC) – Federal Reserve committee that makes key decisions about interest rates and the growth of the U.S. money supply
  • Board of Governors – the seven-member board that oversees the Federal Reserve System
  • Federal Reserve Districts – the twelve banking districts created by the Federal Reserve Act
  • Federal Reserve System – the nation’s central banking system
  • Federal funds rate – interest rate banks charge each other for loans
  • Interest rates – the price paid for the use of borrow money or money earned by deposited funds

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