Macro Issues for the GHSGT

• Gross Domestic Product

• Nominal v. Real• Consumer Price

Index• Unemployment• Inflation• Fiscal Policy Tools• Monetary Policy

Tools

Gross Domestic Product• Gross Domestic Product is the measure of the final

goods and services that are bought and sold in an economy in a given period

• It is measured through adding together consumption, investment, government purchases, and net exports

• C+I+G+X is the formula• Consumption

– The spending by consumers on final goods and services

• Investment– The spending by business on machinery and changes in

inventory

• Government Purchases– All purchases made by government, excluding transfer

payments

• Net Exports– The difference between imports and exports

Nominal vs. Real Numbers

• Nominal are the actual dollar values computed during the given time period

• Real numbers are computed based on a “base year’s” dollars

• The reason we do this is to get a better indication of the costs of products and services and the cost of living

Consumer Price Index• The Consumer Price

Index is what we use to measure the cost of living in the United States

• It is a measure of 300 goods and services that is referred to as a “market basket”

• This is how we measure the difference between nominal and real costs

• This is also how we measure inflation

• Cost of living allowances are tied to CPI

Business Cycle• Expansion

– Positive and expanding GDP

• Peak– The highest growth of GDP

in a cycle

• Contraction– Positive but declining GDP

• Recession– Negative and shrinking

GDP

• Trough– The bottom of a GDP cycle

• Recovery– Negative but increasing

GDP

Types of Unemployment•Frictional

The natural unemployment that comes from individuals between jobs

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•Cyclical

The type of unemployment that stems from the changes in the business cycle

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•Structural

The type of unemployment that stems from changes in the structure of industry

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InflationA general rise in the level of prices• Demand-Pull• Cost-Push

– Wage-Push– Supply Shock

Does inflation hurt everyone?Inflation Hurts:

• Savers• Those on fixed

incomes

Inflation Helps:

• Debtors

Fiscal PolicyControl of the money supply through

government policies• Contractionary Fiscal Policy

– Increase Taxes– Decrease Spending

• Expansion of Fiscal Policy– Decrease Taxes– Increases Spending

Monetary PolicyControl of the money supply through the

Federal Reserve Bank• Open Market Operation

– Buying and Selling of government securities

• Reserve Requirement– The amount of deposits that banks are

required to keep on hand• Discount Rate

– The rate at which the Fed loans money to member banks

Banks and Creation of MoneyThere are three types of money identified by the Federal Reserve:

• M1– Most liquid– Currency and checkable deposits

• M2– M1 + Near-money savings, small time

deposits, MMMF• M3

– M2 + Large time deposits

Banks create money through loans

– You make a deposit– The bank has a

reserve requirement– The rest they can

lend– By lending the rest,

they have created “new money” that is in the economy.

– Not only is the money still in your account, but now it is loaned out to someone else as well

Types of Taxes

• Progressive Tax: Higher % rate of tax on persons with higher incomes-Federal income tax

• Regressive Tax: Higher % rate of tax on people with lower incomes-Examaple: sales tax

• Proportional Tax: Same % rate of tax on everyone, regardless of income; aka flat tax