Assignment One

The Real GDP is defined as the total market value of all final goods adjusted for inflation, measured in US Dollars. The graph above demonstrates the Real GDP at an annual rate. Since the 1980's the Real GDP has been on a relatively steady upturn. Which means that the Real GDP of the United States has grown. When the GDP of a nation grows, that nation is producing more final goods domestically. The Real GDP can be affected by a variation of things. As shown in the graph above, in times of recession starting from 1980, represented by the vertical shades of deeper blue, GDP has had downward slopes. When GDP is down, it affects the economy. As GDP falls, its impacts include a rise in unemployment which means a recession occurs. Secondly, the less is produced as final goods the lower GDP a nation is accumulating.

Starting in roughly 2008, the United States was affected by one of the worst falls in GDP(from 1980's to 2015) brought on by the recession that was taking place. At that point in time, unemployment was at its highest it had been in the period of time showed in the above graph (Real GDP); the more unemployment the more people aren't working, the more people aren't working the less they are producing. The recession that started in 2008 reached its lowest point in 2009. After 2009, the GDP began to rise again. However, it didn't reach the point it was at pre-recession until roughly 2011. On the other hand, the GDP has shown steady growth rates. The most notable growth period is represented in the graph started in the 1990's. Factors such as the Internet bubble made a positive impact for many years years. For the 35 years represented in the graph, the GDP has been on a steady incline, although the natural business cycles has affected it minimally overall, GDP has risen. GDP is calculated by the following formula y= Consumption+ Investment+ Government spending+ (Exports-Imports).

Real GDP per capita is the measure of the total output of a country, taking into account GDP divided by the population of the country. GDP per Capita is a simple way that most counties have adapted in order to uniformly measure the wealth of their citizens. Like Real GDP it is also measured in US Dollars. GDP per Capita as shown in the graph above from the period of 35 years (1980-2015) has also been on an relatively steady incline. Although declines have occurred the most visible ones are a product of the periodic recessions that are bound to happen (shown in the vertical lines of deeper blue).

In more recent times the recession of 2008 has had the steepest decline. Meaning that in 2008 citizens saw a decline in production which in turn also affected employment rates. Pre-recession GDP per Capita was at roughly $50,000, at the lowest point of the recession in 2009 it dropped to about $47,000. This decline of about $3,000 doesn't seem like a lot, but the amount of time that it took for GDP to reach the pre-recession level was about 5 years (2009-2015). Only after GDP per capita reached the level it was up to pre-recession did it start to grow again.

Since the Great Recession GDP per capita has been growing but at slower rates than it was pre-recession. Although GDP per capita is the most commonly used unit of measurement it is flawed. The data that is required in order to calculate GDP per capita fails to include environmental factors that can have a big impact the welfare of it's citizens and GDP. It also fails to include any shadow economy (illegal) activity it also excludes those who are being paid in cash. Lastly, it fails to include household and domestic production, an example of this is childcare all which affect the over all average for Real GDP.

The Consumer Price Index is the measure of the overall cost of the goods and services bought by a typical consumer. CPI is used to measure the inflation rate of the overall U.S economy. It takes into consideration everything that an average consumer might buy in that given year. It can also be used as an indicator of the U.S dollars' worth.

In order to find Inflation rates with CPI you need to have a base year with its own fixed basket. You also need to find your fixed basket for the current year. (You find the fixed basket of any year by multiplying the price times the quantity of each item and adding them all together.). You then divide the current year by the base year and multiply by 100 to find the CPI for any year.

In order to find the inflation rate you need to subtract the CPI of this year from the CPI of last year than divide that from the CPI of last year, finally you have to multiply by 100 to find the percentage. Although the CPI is the most commonly used due to its accuracy,it has some flaws. Starting with the Substitution biased which occurs when prices change throughout the years, and the natural consumer reaction is to buy the cheapest thing. This is not reflected in the measurement for inflation. The next problem is the Introduction of New Goods. This introduces the consumer to more variety to choose from. This is a problem for calculating CPI because it can lower the cost of maintaining the same level of economic well-being. Lastly, the quality of products change over time. Some products can be the same price over time with major changes to the quality. With advancing technology the quality and quantity of what is produced is far greater than what it used to be, with the unchanging price. When CPI is used to find the Inflation rate it is important to know that inflation is the percentage change of the U.S dollars worth.

If an economy has high inflation it means that consumers need to spend more in order to buy the same things that they were buying before. Inflation is needed for the growth of an economy. For example, from the years 1986 -1990 inflation was going up which means prices were going up. Then in the time period after from around 1990-1992, inflation rate began to decrease, this does not mean that prices are going down, it just means that they are going up at slower rates this is called disinflation. When ever inflation is above the zero percent mark, prices are increasing. During the Great Recession we saw a period of deflation. Deflation occurs when inflation rates go below zero which is the only time that prices go down.

The Civilian unemployment rate takes different types of unemployment into consideration but first unemployment is defined as the total number of people who are actively searching for work but do not currently have jobs. Employment and unemployment affect the overall U.S labor force. The labor force is found by calculating the sum of those who are employed and those who are unemployed. The unemployment rate is found by taking the number of unemployed workers and dividing by the labor force, then multiplying by 100 to get the percentage.

The different variations of unemployment include; Structural, Seasonal and Frictional unemployment. Structural unemployment is defined as unemployment as a result of people seeking jobs in a specific labor market where jobs are very few and limited. Frictional unemployment is defined as workers who are unemployed due to wanting a better job opportunities. Seasonal unemployment is defined as people who are otherwise employed but are unemployed due to the work season. One of the most common examples are teachers, they work for 10 months but are considered unemployed for the 2 months of summer.

All forms of employment and unemployment fall into something called Cyclical Unemployment. Cyclical Unemployment is measured with the downturns and upturns of the economy. Like calculating CPI, calculating unemployment also has its flaws. One flaw is that people have a tendency to lie. Either they can be embarrassed of their current employment status or they are working off the books. Either way they are being dishonest and are in turn lowering the unemployment rate. The second problem is that the unemployment rate does not take into consideration the workers who have become discouraged and have stopped actively searching for jobs. This also lowers the unemployment rate.

The natural rate of unemployment takes into consideration frictional and structural unemployment. During periods of recession unemployment rate increases. For example starting in 2008 unemployment soared from about 4.5 to its peak at about 10.5 in 2010. Since then, both the government and the Fed have implemented policies to lower unemployment and increase money supply. The Government is able to control Fiscal Policy which the The Fed is able to control/manipulate Monetary Policy.

Unemployment is always changing and is never 100% accurate to the actual situations specific people face. Unemployment can play an important role in identifying the way GDP fluctuates. When people have jobs and feel secure in their work place they on average spend more which rises the consumption which increases GDP. It can also work the other way around. If people don't feel like they have job security they on average tend to save more which lowers the overall GDP.

The current US unemployment rate is 3.9 which is below the natural rate of unemployment. No democratic country should strive for zero unemployment, so having a unemployment rate below the natural rate of unemployment is not a good thing. Structural and Frictional unemployment are important because people have the right to look for better jobs in different fields.

The definition of The Federal Funds Rate is the interest rate at which commercial banks lend out to other commercial banks over night. The Federal Funds Rate is only between the commercial banks themselves, the Fed is not directly involved. The Federal Funds Rate is part of Monetary Policy that is influenced and can be manipulated by the Fed. The federal funds rate is when commercial banks loan out their excess reserves to other commercial banks with a reserve deficit.

The first way that The Fed can indirectly manipulate the federal funds rate by increasing or decreasing the required reserve ratio that the commercial banks need to maintain. Depending on how the economy is doing as a whole and if the Fed is implementing Expansionary or Contractionary policies. We see Expansionary policies implemented when the U.S is in recessions. The purpose of Expansionary policies is to increase the money supply, one way in which the money supply can be increased is by increasing the Required Reserve Ratio. The Required Reserve Ratio is the amount of deposits a commercial bank is required to have on hand. Banks may be having a good day and have lent out a lot of loans leaving them with a required reserve deficit. While other banks might have had bad day and not lend out a lot of money leaving them with excess deposits.

Before the Great Recession began the federal funds rate was at about 5.5%. When the Great Recession started (about 2008) the graph above shows that the percentage rapidly began to drop and even reached the zero percent mark. When the Fed lowers the interest rate to zero it becomes known as a Liquidity Trap, which means that the Fed has done all it can do and monetary policy becomes ineffective after that point (0% mark). The lowest the interest rate can be is zero. This was heavily influenced by the Fed using Expansionary Money Policy and lowering the required reserve ratio. The second way that the Fed can indirectly manipulate the Federal Funds Rate is by increasing or decreasing the Discount Rate. The Discount Rate is when banks are running low on reserves, they may borrow reserves from the Fed. The discount rate indicates the interest rate on loans the Fed makes to banks. This is another tool that can be either Expansionary or Contractionary policies. By lowering the Discount Rate the Fed is able to increase money supply are able to manipulate the commercial banks into stimulating the economy. The Fed can also increase the Discount Rate by imposing higher interest rates which therefore decrease the money supply. Increasing the Discount Rate and the Required Reserve Ratio are policies that are only used when inflation makes prices go up and an Inflationary Gap appears in the AS-Module. By lowering the required reserve ratio they increased the money supply as a way to stimulate the economy and try to get out of the Great Recession.