SSEMA1, SSEMA2, SSEMA3EOCT Review
SSEMA1-A.The Components of GDP
 Recall: GDP is total spending.
 Four components:




Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
 These components add up to GDP
(denoted Y):
Y = C + I + G + NX
U.S. GDP and Its Components, 2007
billions
% of GDP
per capita
Y
$13,841
100.0
$45,825
C
9,734
70.3
32,228
I
2,125
15.4
7,037
G
2,690
19.4
8,905
NX
–708
–5.1
–2,344
ACTIVE LEARNING
1
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $1200 on a computer to use in her
editing business. She got last year’s model on sale
for a great price from a local manufacturer.
D. General Motors builds $500 million worth of cars,
but consumers only buy $470 million worth of them.
ACTIVE LEARNING
Answers
1
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.
5
ACTIVE LEARNING
Answers
1
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
Current GDP and investment do not change, because
the computer was built last year.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million of them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
6
SSEMA1-B.
 Gross Domestic Product (GDP)
 the total value of all final goods and services
produced in the US
 Economic Growth
 Growth allows successive generations to
have more and better goods and services
than their parents. An increase in standard
of living
 Unemployment
 The percentage of the nation’s labor force
that is out of work
SSEMA1-B.
 Consumer Price Index (CPI)
 A price index determined by measuring the price of a standard
group of goods meant to represent the “market basket” of a
typical urban consumer
 Inflation
 The general rise in price levels
 Stagflation
 A decline in real GDP combined with a rise in the price level
 Aggregate Supply
 The total amount of goods and services in the economy
available at all possible price levels
 Aggregate Demand
 The total amount of goods and services in the economy that will
be purchased at all price levels.
SSEMA1.-C. Real GDP Per Capita
Real GDP is the value of the total
production of goods and services within a
country during a particular period time
(usually one year). The number is adjusted
for inflation so one year’s production can be
compared with another’s.
Per Capita GDP is the GDP figure divided
by the population of the country
Real versus Nominal GDP
 Inflation can distort economic variables
like GDP, so we have two versions of
GDP:
One is corrected for inflation, the other
is not.
 Nominal GDP values output using
current prices. It is not corrected for
inflation.
 Real GDP values output using the prices of
a base year. Real GDP is corrected for inflation.
EXAMPLE:
Pizza
year
2005
2006
2007
P
$10
$11
$12
Latte
Q
400
500
600
P
$2.00
$2.50
$3.00
Q
1000
1100
1200
Compute nominal GDP in each year:
2005:
$10 x 400 +
=
$6,000
2006:
$11 x 500 + $2.50 x 1100 =
$8,250
2007:
$12 x 600 +
$2 x 1000
$3 x 1200
= $10,800
Increase:
37.5%
30.9%
EXAMPLE:
Pizza
year
2005
2006
2007
P
$10
$10
$11
$12
Latte
Q
400
500
600
P
$2.00
$2.00
$2.50
$3.00
Compute real GDP in each year,
using 2005 as the base year:
Q
1000
1100
1200
Increase:
2005:
$10 x 400 + $2 x 1000
= $6,000
2006:
$10 x 500 + $2 x 1100
= $7,200
2007:
$10 x 600 + $2 x 1200
= $8,400
20.0%
16.7%
SSEMA1-C. Inflation etc.
Inflation: rise in general price level
change in price level
Inflation rate= beginning price level
x 100
Creeping inflation: 1-3% per year
Galloping inflation: intense; 100-300% per year
Hyperinflation: 500% per year and above
Deflation: decrease in general price level
EXAMPLE:
Nomina
l
year
GDP
2005
$6000
2006
$8250
2007 $10,800
Real
GDP
37.5% $6000
$7200
30.9%
$8400
20.0%
16.7%
 The change in nominal GDP reflects both prices and
quantities.
 The change in real GDP is the amount that
GDP would change if prices were constant
(i.e., if zero inflation).
Hence, real GDP is corrected for inflation.
SSEMA1-C. Who is
“Unemployed?”
Three criteria:
 Available for work &
 made specific effort to find a job in
the past month
 Worked for pay < 1 hour in the past
week (people with part-time jobs
are considered employed)
SSEMA1-C. Unemployment
unemployment rate calculation:
Number of unemployed individuals
Total # of persons in civilian labor force
How the CPI Is Calculated
1.
2.
3.
Fix the “basket.”
The Bureau of Labor Statistics (BLS) surveys consumers to
determine what’s in the typical consumer’s “shopping basket.”
Find the prices.
The BLS collects data on the prices of all the goods in the basket.
Compute the basket’s cost.
Use the prices to compute the total cost of the basket.
How the CPI Is Calculated
4. Choose a base year and compute the index.
The CPI in any year equals
100 x
cost of basket in current year
cost of basket in base year
5. Compute the inflation rate.
The percentage change in the CPI from the preceding
period.
Inflation
=
rate
CPI this year – CPI last year
CPI last year
x 100%
EXAMPLE
basket:
{4 pizzas, 10
lattes}
year
price of
pizza
price of
latte
2007
$10
$2.00
$10 x 4 + $2 x 10
2008
$11
$2.50
$11 x 4 + $2.5 x 10 = $69
2009
$12
$3.00
$12 x 4 + $3 x 10
cost of basket
= $60
= $78
Compute CPI in each year usingInflation
2007 base
rate:year:
2007: 100 x ($60/$60) = 100
2008: 100 x ($69/$60) = 115
2009: 100 x ($78/$60) = 130
115 – 100
x 100%
15% =
100
130 – 115
x 100%
13% =
115
ACTIVE LEARNING 1
Calculate the CPI
price
price
of
of
chicke
beef
n
CPI basket:
{10 lbs beef,
20 lbs chicken}
The CPI basket cost $120
in 2004, the base year.
2004
$4
$4
2005
$5
$5
2006
A. Compute the CPI in 2005.
$9
$6
B. What was the CPI inflation rate from 2005-2006?
20
ACTIVE LEARNING
Answers
CPI basket:
{10# beef,
20# chicken}
Household
basket in 2006:
{5# beef,
25#
chicken}
2
beef
chicken
cost of CPI
basket
2004
$4
$4
$120
2005
$5
$5
$150
2006
$9
$6
$210
A. Compute cost of the 2006 household basket.
($9 x 5) + ($6 x 25) = $195
21
ACTIVE LEARNING
Answers
CPI basket:
{10# beef,
20# chicken}
Household
basket in 2006:
{5# beef,
25#
chicken}
2
beef
chicken
cost of CPI
basket
2004
$4
$4
$120
2005
$5
$5
$150
2006
$9
$6
$210
B. Compute % increase in cost of household basket over
2005-6, compare to CPI inflation rate.
Rate of increase: ($195 – $150)/$150 = 30%
CPI inflation rate from previous problem = 40%
22
SSEMA1-D.Types of
unemployment
 Frictional: Unemployed people don’t always take the very first job they
can find. They often wait to find a job that fits their talents and
preferences. While they search for a job that is a good fit, these people
are frictionally unemployed. Other people sometimes purposefully
decide to leave a job and look for one that better fits their interests and
abilities. These job seekers are also considered frictionally unemployed.
Overall, frictional unemployment is not entirely bad for an economy
because it gives people time to find a job that suits their needs.
 Structural: Structural unemployment occurs when you have job skills
that no one wants, or when a company wants to hire somebody but can’t
find anyone who has the necessary requirements. Suppose you worked
at a company that made old-fashioned phones with dials. Almost no one
wants these phones anymore, so once your company closes there is no
place for you to use your old-fashioned-phone-making skills. At the
same time, suppose that a local company needs people who can design
computer networks, but no one in the community has experience in this
area. This type of mismatch is a typical example of structural
unemployment.
Unemployment- continued
 Cyclical: Most economies encounter cyclical
periods of growth and recession. During
boom years, unemployment drops
dramatically as companies hire new
workers to match the higher demand.
However, boom periods often overreach,
and these are followed by recessions.
People who are laid off as a result of a
contracting economy are cyclically
unemployed.
 Seasonal: due to changes in weather or change
in demand for certain products
You might find a question like the
following on the EOCT:
Peggy, a recent college graduate, decides
to look for a job instead of going to
graduate school. If she is unable to find a
job that suits her interests right away,
what type of unemployment is she MOST
likely experiencing?
A structural
B seasonal
C frictional
D cyclical
Answer to sample question
While Peggy may be experiencing
cyclical unemployment because of a
downturn in the economy, the question
notes that she is trying to match her
skills with a job that she wants.
Therefore she is experiencing frictional
unemployment (choice C).
SSEMA1-E.Cycle Phases
Recession & Depression
 Recession: real GDP decreases for 2
quarters (6 months) in a row
 Depression: severe recession w/3 more
elements
 Very high unemployment
 Acute shortages
 Excess manufacturing capacity (idle or
partially unused factories)
SSEMA1-E.Cycle Phases
 As GDP increases,
there is expansion.
When expansion
reaches a peak,
recession begins.
Recession ends at the
trough, and
expansion (and
recovery) begin at
that point.
The British call the peak a boom
We call the line above the trend line.
SSEMA1-F National Debts and
Government Deficits
What is the difference between
national debt and government
deficits?
 National debt is all the money the
gov’t owes to bondholders
 Gov’t deficits is when the gov’t
spends more than it raises in
revenues
Total Public Debt:
SSEMA2 The student will explain the
role and functions of the Federal
Reserve System.
 a. Describe the organization of the
Federal Reserve System.
 b. Define monetary policy.
 c. Describe how the Federal Reserve
uses the tools of monetary policy to
promote price stability, full
employment, and economic growth.
SSEMA2-What is the Fed?
 The nation’s first true central bank
 Created in 1913
 National banks required to be
member
 State banks eligible to be a member
 Privately owned Publicly operated
 Federal Reserve Notes (gold standard
1913-1934)
a. Describe the organization of the
Federal Reserve System.
The Federal Reserve System
consists of:
 Board of Governors
(7 members),
located in Washington, DC
 12 regional Fed banks,
located around the U.S.
 Federal Open Market
Committee (FOMC),
includes the Bd of Govs and
presidents of some of the regional Fed banks
The FOMC decides monetary policy.
Structure of the Fed
 Board of Governors
(regulatory and supervisory
group)
 14 year terms
 General policies
 Annual Report to Congress
 Monthly Public Bulletin
Structure of the Fed
 12 Districts, 25 Branches
Structure of the Fed
 Federal Open Market Committee
(FOMC)
(the Fed’s primary monetary policy body)
 How does the money supply grow?
 Where are interest rates set?
 12 voting members
Responsibilities of the Fed
 State Member banks
 Monitor reserves
 Bank Holding Companies
 International Operations
 Foreign banks own about 20% of US banking
assets
 Approx. 800 branches of US banks abroad
 Member bank mergers
b. Define monetary policy.
 Actions by the Federal Reserve
System to expand or contract
the money supply in order to
affect the cost and availability
of goods
c.
Describe how the Federal Reserve uses the
tools of monetary policy to promote price stability,
full employment, and economic growth.
The Fed’s 3 Tools of Monetary Control
1.Open-Market Operations (OMOs): the purchase
and sale of U.S. government bonds by the Fed.
 To increase money supply, (recession) Fed buys govt
bonds, paying with new dollars.
…which are deposited in banks, increasing reserves
…which banks use to make loans, causing the
money supply to expand.
 To reduce money supply, (inflationary period) Fed sells
govt bonds, taking dollars out of circulation, and the
process works in reverse.
The Fed’s 3 Tools of Monetary Control
1. Open-Market Operations (OMOs):
the purchase and sale of U.S.
government bonds by the Fed.
 OMOs are easy to conduct, and are
the Fed’s monetary policy tool of
choice.
The Fed’s 3 Tools of Monetary Control
2. Reserve Requirements (RR):
affect how much money banks can
create by making loans.
 To increase money supply, (recession) Fed reduces RR.
Banks make more loans from each dollar of reserves,
which increases money multiplier and money supply.
 To reduce money supply, (inflationary period) Fed raises
RR,
and the process works in reverse.
 Fed rarely uses reserve requirements to control
money supply: Frequent changes would disrupt
banking.
The Fed’s 3 Tools of Monetary Control
3.The Discount Rate:
the interest rate on loans the Fed makes
to banks
 When banks are running low on reserves,
they may borrow reserves from the Fed.
 To increase money supply, (recession) Fed can
lower discount rate, which encourages
banks to borrow more reserves from Fed.
 Banks can then make more loans, which
increases the money supply.
 To reduce money supply, (inflationary period) Fed
can raise discount rate.
The Fed’s 3 Tools of Monetary Control
3. The Discount Rate:
the interest rate on loans the Fed makes
to banks
 The Fed uses discount lending to provide extra
liquidity when financial institutions are in trouble,
e.g. after the Oct. 1987 stock market crash.
 If no crisis, Fed rarely uses discount lending –
Fed is a “lender of last resort.”
Here is what a question for this
standard might look like:
The Federal Reserve wants to reduce the
nation’s money supply. This could be
accomplished by doing all of the following
EXCEPT
A decreasing the discount rate
B increasing the reserve requirement
C selling securities on the open market
D making banks hold a reserve for all types of
deposits
Answer to sample question
Decreasing the discount rate will
encourage banks to borrow money from
the Federal Reserve and make loans.
This will increase the money supply, so
choice A is the correct answer. All other
choices reduce the nation’s money
supply.
SSEMA3 The student will explain how the government
uses fiscal policy to promote price stability, full
employment, and economic growth.
 a. Define fiscal policy.
 b. Explain the government’s taxing
and spending decisions.
a. Define fiscal policy.
 The use of gov’t spending and
revenue collection to influence
the economy
Federal Taxation
Revenue Collections
 Individual Income
Taxes
 Social Insurance Taxes
 Corporate Income Tax
(revenue tax)
 Excise Taxes
 Estate and Gift Taxes
 Customs Duties
 Tariffs
Revenue Spending








Social Security
National Defense
Medicare
Debt Payments
Transportation
Agriculture
Education
Health and Human Svcs
b. Explain the government’s taxing
and spending decisions.
Fiscal Policy Tools
Expansionary
Tools (recession)
1.Increase gov’t
spending
2.cutting taxes
Contractionary
Tools
(inflationary
period)
1.decreasing gov’t
spending
2.raising taxes
Sample Questions for
Macroeconomics
1 What problem might policymakers be
trying to address MOST if they increase
funding for training programs covering
skills such as computer repair,
programming, and networking?
A frictional unemployment
B structural unemployment
C cyclical unemployment
D seasonal unemployment
Answer to 1
1. Answer: B Standard: Key Economic
Indicators
The policymakers are attempting to
address the question of matching
employee skills to available jobs. This is
a direct reference to structural
unemployment.
Question 2
2 Monetary policies the Federal
Reserve can adopt include all of the
following EXCEPT
A raising the discount rate
B buying government bonds
C lowering the reserve requirement
D raising personal income tax rates
Answer to 2
2. Answer: D Standard: Role of the Federal
Reserve
Choices A, B, and C are important Federal
Reserve monetary policies that directly affect
the money supply. Choice D is the correct
answer because Congress, not the Federal
Reserve, establishes income tax rates.
Question 3
3 Over a two-year period, the nation of
Parthia experiences a steep decline in
unemployment rate, a rise in real GDP,
and a stabilized price level. Parthia
appears to be
A at the start of a recession
B in the middle of a depression
C stagnating economically
D in the middle of a boom period
Answer to 3
3. Answer: D Standard: Key Economic
Indicators
All three economic indicators are
positive. Unemployment is down, the
economy is growing, yet price levels
have not moved. These good times
translate to a boom, choice D.
Question 4
4. If the unemployment rate is
rising and the GDP is falling, the
fiscal policy that the federal government
should MOST likely follow is
A decreasing taxes
B decreasing spending
C decreasing the money supply
D decreasing the reserve requirement
Answer to 4
4. Answer: A Standard: Fiscal policy and the federal
government
Choices C and D are monetary policies, so neither of
these options is correct. Fiscal policy is a tool that the
government uses to regulate the speed of the economy.
When the unemployment rate is rising and the GDP is
falling, the government should speed up the
economy. Decreasing taxes, choice A, would be one
possible way to achieve that goal. Decreasing spending,
choice B, would slow down the already sluggish economy.