Inflation, Unemployment and the Fed

Real GDP
Real GDP stands for real gross domestic product. Real gross domestic product is the total amount
of goods that a nation produces during a particular period. GDP is used in order to determine
whether an economy’s output is growing or shrinking. Although many goods and services are
purchased through-out the period of time, the final goods are what is used to calculate GDP in
order to eliminate over counting for certain materials that go into the product. In order to verify
whether there has been any change in the economy, the prices must remain constant.

Inflation
Inflation is an increase in the average level of prices over a set amount of time. Inflation is usually
used as a percentage in order to measure what the value of money is able to buy for the same
amount of currency. As an example, if I saved the same $100 bill for 25 years, I may have to pay
a different amount for the same supply of a certain item. This is due to the fact that the purchasing
power of the $100 bill was may have lowered because of the inflation of prices of the particular
item. When the price of a particular item is lowered over time, this is known as deflation. When
deflation occurs, the worth of the currency able to purchase more of the product for the same
amount of currency.

Unemployment
Unemployment is when a person is not currently working but is looking for and available for work.
Government surveys are taken at a monthly rate in order to verify how many people in the country
find themselves unemployed. Every month the surveyors visit approximately 60,000 households
in order to verify who (over the age of 16) is employed and who is not. There are three different
types of unemployment: Frictional unemployment, Structural unemployment, and cyclical
unemployment. Frictional unemployment occurs whenever there is a gap between the time that the
employee is ready to work and the employee is hired. An example of this is the case of college
graduates waiting to get hired in the field that they have studied for. The second form of
unemployment is structural. Structural unemployment is a result of worker qualifications not
meeting advancing technological changes. “The widespread introduction of personal computers
since the 1980s, for example, has lowered demand for typists who lacked computer skills.” (Saylor
Academy, 2012). The third example of unemployment is cyclical. Cyclical unemployment is the
natural excess of people that find themselves without work. This type of unemployment tends to
vary widely depending on the economic situation.

Explain the concepts of aggregate supply and aggregate demand, including recessionary
and inflationary gaps.
Aggregate supply is the total amount of goods and services that is provided by an economy during
a period of time with a fixed price level. The aggregate supply can be changed by a number of
different situations. Inflation, Technological innovations, and increases in labor size can all affect
the amount of aggregate supply that is being output. When an economy needs to increase the total
amount of goods or services being provided, it is clear that there is an increase in aggregate demand
which must be compensated for by having a higher number of products. Aggregate demand is the
total amount of money exchanged for the total amount of products being provided by the economy.

A recessionary gap is when the GDP is lower than the potential output that it can achieve. This is
usually an effect from employment levels not being able to reach their standard levels.

“If employment is below the natural level, as shown in Panel (a), then output must be below
potential. Panel (b) shows the recessionary gap YP − Y1, which occurs when the aggregate demand
curve AD and the short-run aggregate supply curve SRAS intersect to the left of the long-run
aggregate supply curve LRAS.” (Saylor Academy, 2012)

Conversely, when the GDP is higher than the potential output that it can achieve, we experience
an Inflationary gap. This is a result of employment being above its natural level.

Explain what the Fed does

The primary goals of the Fed include controlling inflation while working to reach a low
unemployment rate with stable price levels and economic growth. The Fed sets and carries out
monetary policy and pushes interest rates up or down. The two goals that the Fed is constantly
trying to reach is price stability and sustainable employment. These two goals are known as the
Feds “Dual Mandate”. To become fully responsible for management of interest rated and economic
situations, the Fed uses three main tools:

Open market operations: Allows the fed to alter the price of money through the federal funds
rate.
Discount rate: Interest rates that banks and other institutions are charged to borrow from the
Federal Reserve.

Reserve requirements: The amount of money that an institution is obligated to keep in Federal
Reserve vaults, to make sure that costumer deposits are secure.

What happens when the Fed pursues an expansionary or contractionary policy?

The fed uses expansionary policies to stimulate an economy when it slows. Expansionary policies
help the Fed with reducing taxes, increasing government spending and increasing consumer
payments via tax refunds. Contractionary policies help slow down an economy by increasing taxes
and decrease government spending.

DC hold'em; The Federal Reserve

This article speaks about the Federal Reserve raising interest rates from close to zero in December,
where they had been since 2008, to between 0.25% and 0.5%. Members of its committee expected
four more increases in 2016. “Three-quarters of the economists polled before the meeting by the
Wall Street Journal had expected a rate rise in June, at what is now the Fed's next meeting. After
this week's dovish statement, they will surely put back that date.” (bi.galegroup.com, 2016) This
article also talks about how inflation (one of the feds targets) is also rising. The Fed's preferred
index of core inflation, which excludes volatile food and energy prices, is up by 1.7% year on year.
They estimate that one of the reasons why there has been delay in the increase of rates was weak
growth; with less than 1% annualized growth. Payrolls swelled by 215,000 in March--well above
the level of employment growth needed to reduce slack in the economy. In conclusion, after
reading the article I have assessed that the fed has shifted it priority towards improving growth
instead of concerning itself with the world economy because they have little effect over the GDP
stalling due to low rising of productivity.

Fed Slows Down on Plans to Pursue Interest Rate Increases

This article speaks about the Feds plan to raise rates because of the weakness of the global
economy. Due to financial constrictions, the committee decided during their annual meeting that
it would be best to delay raising the rate even though it was understood that there would be an
increase. “What you see here is a virtually unchanged path of economic projections and a slightly
more accommodative path” (Appelbaum, 2016) By increasing borrowing costs to certain
corporations, financial markets are doing the job of he fed. What I have gathered from this article
is that there has been a decision to slow down on interest rate increases due to a curiosity as to how
the economy is going to react. “The committee expects that economic conditions will evolve in a
manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is
likely to remain, for some time, below levels that are expected to prevail in the longer run.”
 References

Appelbaum, B. (March 16, 2016) Fed Slows Down on Plans to Pursue Interest Rate Increases
Retrieved from: https://www.nytimes.com/2016/03/17/business/economy/fed-interest-
rates-meeting.html

bi.galegroup.com (April 30, 2016) DC hold'em; The Federal Reserve

Retrieved from:
http://bi.galegroup.com.ezproxy.snhu.edu/global/article/GALE%7CA451181865?u=nhc_
main

Saylord Academy (2012) Principles of Economics

Retrieved from:
http://www.saylor.org/site/textbooks/Principles%20of%20Economics.pdf