Macroeconomic Goals and GDP Measuring Broad Economic Goals The goals of U.S. macroeconomic policies are captured into two laws: The Employment Act of 1946 Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act) Committed the federal government to maximize employment and economic growth, and maintain a stable price level Went further and committed the government to reach an unemployment rate of 4 percent, to stabilize the price level with a target inflation rate of zero percent, and to maintain steady economic growth Macroeconomic Goals: 1)Full Employment, 2)Price Stability, 3)Economic Growth 1) Full Employment Exists when most individuals who are willing to work at the prevailing wages in the economy are employed (natural level of unemployment) Unemployment Frictional unemployment Structural unemployment Cyclical unemployment 2) Price Stability Exists when the average level of prices in the economy is neither increasing or decreasing Price Instability Inflation Deflation 3) Economic Growth Measuring Employment Labor Force= People at work (employed) + people actively looking for work (unemployed) (16+) LFPR= # in labor force/adult population * 100 UR= # of unemployed/Labor Force Measuring Price Changes Consumer Price Index (CPI)= weighted cost of base-period items in current-year prices/ weighted cost of base-period items in base-year prices * 100 Price change= change in CPI/ beginning CPI * 100 Gross Domestic Product (GDP) GDP= C (consumption spending) +I (investment spending) +G (government spending) + NX (net exports: exports-imports) Only final retail price of new good or service No purely financial transactions Real GDP vs. Nominal GDP Real GDP in Year 1= (nominal GDP* 100)/ Price Index Output Growth= (real GDP in Year 2 – real GDP in Year 1)/ real GDP in Year 1 * 100 Inflation Cost-push inflation: inflation created when an increase in the cost of production (wages or raw materials) shifts the short-run AS curve to the left; tends to push prices up while reducing the level of real GDP at the same time (stagflation) Demand-pull inflation: inflation that follows from an increase in aggregate demand, which will cause equilibrium real GDP (Y) to increase and the equilibrium price level (P) to increase. Inflation Anticipated inflation- built in and expected to occur Unanticipated inflation- not expected or unforeseen Boot-leather costs/ menu costs Fishers= Nominal interest rate=real interest rate + inflation Real interest rate= nominal - inflation