• The study of the behavior and decision making of the entire economy

• Examines major trends for the economy as a whole

• Command Economy–Economic system in which the central

government makes all decisions on the production and consumption of goods and services

–Cuba–North Korea

• Market Economy– Economic system in which the decisions

on production and consumption of goods and services are based on voluntary exchange in markets.

–U.S.–Hong Kong

1. Households– Own the factors of production (land,

labor, and capital)– In the Product Market, Households pay

Businesses for goods and services– In the Resource Market, Households

supply firms with their land, labor, and capital.

2. Businesses–In the Product Market, Businesses

supply households with goods and services

–In the Resource Market, Businesses pay Households for their land, labor, and capital

3. The Government– In the Product Market, the Government pays

Businesses for goods and services– In the Product Market, the Government

supplies households with goods and services– In the Resource Market, the Government

pays Households for their land, labor, and capital

1.Full Employment2.Price Stability3.Economic Growth

Key Definitions

• Employed– Everyone 16 or older currently working, including

part time workers

• Unemployed– People 16 or older looking for work or temporarily

laid off from work

• Labor Force– Employed + Unemployed

How does the Gov’t measure it?

• The Government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country.

• There are about 60,000 households in the sample for this survey. This translates into approximately 110,000 individuals.

Unemployment Rate =Number of Unemployed

Labor Force X 100

• Frictional Unemployment–Occurs when people are temporarily

between jobs–They may have quit one job to find

another or they could have just graduated

–Examples:

• Structural Unemployment–Occurs when workers’ skills do not

match the jobs available• Causes

1.New technology2.New resources3.Changes in Consumer Demand4.Globalization5.Lack of Education

• Examples:

• Cyclical Unemployment–Occurs because businesses do not

need a worker’s labor due to a lack of demand or a downturn in the business cycle.

–Examples:

• Price Stability–A situation in which prices in an

economy don't change much over time.

–Price stability would mean that an economy would not experience inflation or deflation.

• Inflation–A general increase in prices

• Measured by Price Index –a measurement that shows how the

average price of a standard group of goods changes over time

–Best known Price Index• Consumer Price Index (CPI)

• Economic Growth– Steady, long-term increase in GDP

• Production Possibilities Curve (PPC)– Outward Shift

• What does Economic Growth depend on?– Quantity of Productive Resources (land, labor, &

capital) available– Quality of Productive Resources available– Technology

• GDP – Gross Domestic Product– Dollar value of all final goods and services

produced within a country’s borders in a given year

• Expenditure ApproachGDP = C + Ig + G + Xn

•C - Consumer Spending– Largest component of the GDP– It is calculated by adding spending on

durable and non-durable goods and services

• Ig – Investment Spending– Spending by businesses on capital resources– Purchasing the machines, tools and

buildings needed to produce goods and services

– Additions to inventories

**Buying a newly constructed house falls under Investment Spending**

•G – Government Spending–Includes spending on goods and

services needed to provide public services

•Xn – Net Exports

• Net Exports (Xn) = Exports - Imports

Components• Government Spending

–Increased • Taxes

–Decreased

Goals

• Encourage economic growth in the economy– Raise the level of output (GDP)

• Used when the economy is in a recession or to try and prevent a recession

• Will increase budget deficit• What affect should Expansionary Fiscal Policy

have on Unemployment? Why?– Decrease It

Components• Government Spending

–Decreased • Taxes

–Increased

Goals

• Slow down the output in the economy• Used to control high inflation in our economy • Will decrease the budget deficit• What affect should Contractionary Fiscal

Policy have on Unemployment? Why?– Increase It

• Medium of Exchange–It can be used to buy goods and services

• Store of Value–It keeps its purchasing power over time

• Unit of Account–It tells you how much different goods

and services are worth

$999 $799

• Durability– must withstand physical wear and tear

• Portability – must be able to take money with you

• Divisibility – must be easily divided into smaller parts

• Uniformity – same denominations must have equal

purchasing power

• Limited Supply– must be restrictions on the amount available

• Acceptability – everybody must be able to use the money for

transactions

• Commodity Money– Objects that have value in themselves in

themselves and that are also used as money• Representative Money

– Objects that have value because the holder can exchange them for something else of value

• Fiat Money– Money that has value because the government

orders or decrees it “legal tender”

“The Fed”• Central Bank of the United States• Composed of 12 regional Reserve banks• Serves as a “bank for banks”

– Holds deposits for banks, store banks’ excess currency, provide check clearing services

• Serves as a bank for the U.S. government– Holds checking accounts for the government, receives

revenue for the government

• Manages the Money Supply– Make sure that the prices of goods and services are

relatively stable over time

M 1

• Includes money that is readily accessible for spending

• Consists of:– Currency, demand deposits (checking accounts),

traveler’s checks and other checkable deposits

• Currency held outside of bank vaults is the largest component of M 1

M 2

• Represents “close substitutes for money” or “near money”

• Consists of:– Savings accounts, Money Market Mutual Funds

for individuals

• Savings accounts are the largest component of M 2

M 3

• Equals M 2 plus long time deposits and institutional money-market funds

• No longer published or revealed to the public

• Liquidity–Liquidity refers to the ability

to quickly and easily convert assets into cash without incurring a significant loss.

• Open Market OperationsOpen Market Operations– The Fed buying and selling of government securities

(bonds) to alter the supply of money– Most used monetary policy

• Discount Rate (Federal Funds Rate)Discount Rate (Federal Funds Rate)– Interest The Fed charges on loans they grant to

commercial banks.

• Reserve Requirements (Reserve Ratio)Reserve Requirements (Reserve Ratio)– Fractions of checking account balances that banks must

maintain as currency reserves; Reserves– What the banks must keep in the vaults for withdrawals

• Goal of Expansionary Monetary Policy is to increase the Money Supply and increase Total Spending

• Open Market Operations– The Fed “BUYS” government securities (bonds)

from banks

• Discount Rate (Fed Funds Rate)– The Fed “DECREASES” the Discount Rate

• Reserve Requirements (Reserve Ratio)– The Fed “DECREASES” the Reserve Requirements

Other Goals

• Encourage economic growth in the economy– Raise the level of output (GDP)

• Used when the economy is in a recession or to try and prevent a recession

• Will increase budget deficit• What affect should Expansionary Monetary

Policy have on Unemployment? Why?– Decrease It

• Goal of Contractionary Monetary Policy is to decrease the Money Supply and decrease Total Spending

• Open Market Operations– The Fed “SELLS” government securities (bonds)

from banks

• Discount Rate (Fed Funds Rate)– The Fed “INCREASES” the Discount Rate

• Reserve Requirements (Reserve Ratio)– The Fed “INCREASES” the Reserve Requirements

Other Goals

• Slow down the output in the economy• Used to control high inflation in our economy • Will decrease the budget deficit• What affect should Contractionary Monetary

Policy have on Unemployment? Why?– Increase It