ECON 205 2nd Edition Lecture 5 Outline of Last Lecture I Schedule of demand and supply II Shift or change in demand and supply III Market equilibrium IV Elasticity of supply and demand V Consumer and producer surplus VI Factors of production VII Role of government in a market economy price controls floor and ceiling VIII Equity fairness and Inequality Outline of Current Lecture Macroeconomic policies A Monetary policy the Federal Reserve board Fed B Fiscal policy taxes expenditures and subsidies the Administration C Market policy market structure D International policy currency regulation II Maximization III Economic Growth of GDP IV Price Stability V Aggregations to understand national output VI Gross Domestic Product VII The problem of averages VIII Price Indices Current Lecture Macroeconomic Policies A Monetary policy is the ability of government to control the money supply available by regulating interest rates The Federal Reserve Fed determines the United States monetary policy Ben Bernanke is the chairman of the board that determines US monetary policy 2007 Great Recession is part of the business cycle Still over 8 unemployment Chairman of the Fed controls the twelve regional banks The current and past chairs are Ben Bernanke Princeton four year terms since 2006 Alan Greenspan Business Economist 1987 2006 B Fiscal policy is taxation government expenditures and subsidies created by the administration the White House Fiscal policy is decided by the White House and approved by Congress while the Fed changes monetary policy weekly C Market policy determines the market structure and promotes competition Current issues are global food shortages due to changes in climate In some areas food prices have gone up over 30 and created bread riots D International policy determines how the currency is regulated Current issues are the Euro currency crises due to extremely high sovereign debt of some member nations like Portugal Spain Greece Ireland Italy etc II Maximization Consumers try to maximize utility businesses try to maximize profit by reducing costs and consumers that own factors of production try to sell it at the highest price III Economic Growth of GDP A rate of 4 growth per year as a national output is a healthy goal of growth 4 unemployment is also ideal IV Price Stability We need a stable rate of inflation of approximately 2 or 3 per year V Aggregations to understand national output Aggregate Supply describes how much output businesses produce and sell at given prices costs and market conditions It is fictive in that to create a supply curve of 10 000 different items too many factors exist to create a meaningful representation Aggregate Demand describes how much consumers demand and buy at given prices costs and market conditions Both depend on price quantity fiscal policy monetary policy and international policy Overall macroeconomic equilibrium is when aggregate demand equals aggregate supply VI Gross Domestic Product GDP is composed of the consumption investment government expenditures and net export values combined Two measures of national product 1 Good flows 2 Earnings flow add income of people rent of people profit of people and interest of people to find the GDP 3 Value added the difference between sales and purchase of materials and services Nominal or Current vs Real GDP Nominal price is the current price what the dollar value is worth at the time Real GDP is the real price based on a base year i e 1970 You take the current price and divide by the price index to determine the real price By doing that you remove the inflation a GDP deflator GDP deflator is the difference between nominal and real GDP Over time consumption as a share of GDP is stable about 70 of the overall GDP Income either goes into consumption or savings which end up in investment During 1950 2000 high income nations experienced rapid growth of output per capita in recorded history The US real GDP per capita increased by 250 a remarkable performance VII The problem of averages When you talk about a per capita income it may be misleading If a person is making 1000 and another is making 100 the per capita income would be 550 But the overall living standard of both people would not be the same as the per capita income VIII Price Indices The Consumer Price Index is a tracker of 80 000 goods and services that are placed into 8 groups The Producer Price Index is a tracker for producer and wholesale prices based on changes of 8 000 commodity prices