MACRO Economics Unit Review
Draw the Business Cycle and Label the following components (the blue square is a drawing
canvas - double click to create the cycle):
Prosperity, Expansion/recovery, Contraction/recession, Depression, Inflationary Gap,
Recessionary Gap, Full Employment Line (natural rate of unemployment), GDP
Define GDP, Inflation, and Unemployment
GDP = gross domestic product. Dollar value of goods/service made in nation in year span
Inflation = decrease of purchase power of set amount
Unemployment = jobless rate in searching for job
What is the equation for GDP (write it out and explain each component)
C+I+G+Xn
c=customer spending. I = business investment. G = gov spending. Xn =Net export-import
List and explain each of the different types of unemployment
Structure = lost market/gone jobs/tech. Fric = fired/quit/new/seasonal. Cylinder = bad econ
Write two examples of how inflation hurts people/organizations and two examples of how
inflation helps people/organizations
Hurt: physical savings
Hurt: Person loaning out money at fixed rate
Help: Fixed rate rent for renter
Help: Fixed loan for receiver of loan
Explain how inflation is calculated
CPI = (price of basket * 100) / (base basket)
Describe the different market structures and provide two examples of each
● Oligopoly
● Examples: apple, AM cars
● Monopoly
● Examples: electric, vanderbelt, Rockerfella
● Perfect competition
● Examples: plant farms = hay, wheat, eggs, berries, cotton
● monopolistic competition
● Examples: Fast-Food. electronics
Fiscal Policy
What is it?
Policies by congress to control GDP
What tools are used
● Gov Spend money
● taxes
Using a car analogy explain contractionary and expansionary fiscal/monetary policy
On the highway. Speed up = ex: more $, low taxes. Slow down = contract: less $, high tax.
Create a scenario where one of the fiscal policy tools could be used to solve the economic
situation described - be sure to include inflation rate, unemployment rate/conditions, and GDP
conditions.
GDP = -5%. Inflation = 0.2%. Unemployment = 10%. Below the line so low taxes/high spending
to fix = work to speed up econ
Monetary Policy
What is it? Fed bank changes money to effect econ
What tools are used - describe each
● Reserve requirements
○ $% that banks must keep, not loaned or invested
■ Decrease % = Expansion (more spending money)
■ Increase % = contract (less spending money
● Discount rate
○ Fed loan interests. Feb receive loans money to banks with interest
■ Ex = increase money supply, decrease discount rate (less interest)
■ Con = decrease money supply, increase discount rate (more interest)
● Open market operations
○ Bonds (most used/important)
■ Ex = Buy Big = increase $ supply. Fed buy gov securities
■ Con = Sell Small = decrease $ supply.
● Interest on Reserves (IoR) (2008)
○ Fed receive pays interest on excess reserves held by banks
■ Ex = Fed lends more = lowers rate paid on excess reserves
■ Con = banks lend less = raise rate
The graphs below show the annual inflation rate in the US from 1965 to 1985. The vertical gray bars
represent depressions.
In 1979, the Chairman of the Federal Reserve used contractionary monetary policy in an attempt to
reduce inflation. Did this policy work? Use data from the graph to support your conclusion.
Yes, it went down a lot. 12+ to 5-
The graph below shows the unemployment rate from 2005 to 2017. The vertical gray bars represent
depressions.
Analyze the graph to the right. If you were in charge of monetary policy in 2009 would you increase or
decrease the money supply? Explain.
Decrease. It was getting high (9+), so decreased money to slow the economy.
If the Federal Reserve starts to express worry about higher inflation would they most likely
increase or decrease the money supply? Explain.
Decrease money supply, high inflation is up so need to slow down