Gov and APMacro: Forecasting



APMacro: Inflation

Consumer Price Index
Inflation is the increase in the general level of prices. The Consumer Price Index measures the prices of a market basket of goods purchased by the typical urban consumer. Demand-pull inflation is caused by an increase in demand (often due to an increase in the money supply) beyond the ability of firms to supply products. Cost-push inflation results from an increase in the cost of production, which causes firms to reduce supply and raise prices.

Inflation affects consumers by reducing the value of the dollar. Nominal income is the wage in current dollars, while real income removes the effects of inflation, measuring the value of what the paycheck will actually buy in the economy. Unanticipated inflation harms people on fixed incomes because they cannot buy as much with the same income. Savers are hurt because the real value of their savings declines. Creditors are hurt because the money repaid does not have the same purchasing power as the money that was originally loaned. Those who have cost-of-living adjustments (COLAs) in their salaries are unaffected by inflation, because their salaries increase with the rate of inflation, holding their purchasing power steady. Borrowers actually win from inflation, because they repay their debts with dollars that hold less value than the dollars they borrowed. Workers try to anticipate inflation by seeking COLAs or pay increases that match or exceed the inflation rate. Banks and other creditors anticipate inflation by adding the expected rate of inflation to the real interest rate, to determine the nominal interest rate they will charge their customers for loans.

Hyperinflation, the worst degree of inflation, is a situation in which inflation is increasing at a rate of several hundred percent a year. Hyperinflation can result in complete economic collapse. After Germany lost World War I, it was forced to pay heavy reparations to the victorious countries. Germany tried to pay this debt simply by printing more money. By November 15, 1923, it took 4.2 trillion marks (German currency) to equal the value of one U.S. dollar. Meaning that the mark was worth so little that even the paper on which it was printed had greater value.

Stagflation is a combination of economic stagnation or slowdown and high inflation. During a period of stagflation, gross domestic product growth is slow or zero, unemployment is high, and prices are rising. Early in the 1970s, the economy received a shock when the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States and other oil importing countries. Supplies of oil dwindled, driving up the price of gas. The inflation rate, which had already reached worrying levels, soared into double digits. As the economy struggled with rising prices, business activity slowed and the unemployment rate climbed.

A decrease in the average price level of all goods and services in an economy is known as deflation. Deflation may occur when aggregate demand decreases more rapidly than aggregate supply. In such situations, sellers are forced to lower prices to attract buyers. As price decreases, the amount a dollar buys increases. Therefore, deflation boosts the real purchasing power of the dollar. The most prolonged and most recent deflationary period in U.S. history occurred during the Great Depression, when high unemployment coupled with reductions in wages caused aggregate demand and prices to fall.

Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the purchasing power of money. But inflation does not mean that all prices are rising. Even during periods of rapid inflation, some prices may be relatively constant while others are falling.



Gov: Constitution Clauses

The United States Constitution and its amendments comprise hundreds of clauses which outline the functioning of the United States Federal Government, the political relationship between the states and the national government, and affect how the United States federal court system interprets the law. When a particular clause becomes an important or contentious issue of law, it is given a name for ease of reference.


APMacro: Problem Set




Chapter 6 Questions: #3, 4, 7, 8a, 9a, 9b,, 11, 12, 13
Chapter  7 Questions #2, 4, 6


Gov: Articles of the Constitution

The main body of the Constitution consists of seven articles. These seven articles are further divided into sections and clauses. The first three articles establish the three branches of government – legislative, executive, and judicial – and define their powers. These articles lay out the basic structure of the national government. The four remaining articles of the Constitution cover various subjects, including relations among the states, the supremacy of national law, and the amendment process.

The first article sets up Congress as the lawmaking body in government. It describes the two chambers of Congress, the Senate and the House of Representatives, as well as the election, terms, and qualifications of their members. It also sets guidelines for rules and procedures in each chamber. This is the longest article in the Constitution, reflecting the founders’ belief in the importance of the legislature in a representative democracy.

Article II establishes the executive branch. The executive branch is led by the president and vice president. The Constitution describes the election, terms of office, and qualifications of these executive officers. It also defines the powers of the president, which include the power to command the armed forces, to make treaties, and to appoint other executive officials.

Article III creates the Supreme Court, the highest court in the land, while leaving Congress to create the lower courts. It defines the jurisdiction of the federal courts, specifying the types of cases that can be tried. It also guarantees the right to trial by jury in criminal cases and defines the crime of treason.

Article IV concerns relations among the states. It has four sections, which make the following key points: “Full faith and credit.” Each state must honor the laws and court decisions of other states. “Treatment of citizens.” No state may discriminate against the residents of another state. It must treat them as it treats its own residents. States must return suspected criminals to the states in which they are wanted. “New states and territories.” Only Congress can authorize the creation of new states. It also has power over territories and other jurisdictions of the United   States. “Protection of states.” The national government guarantees each state a republican form of government. It also promises to protect states from outside attack and, if requested, to help states put down internal rebellions.

Article V describes the amendment process. The framers understood that it might be necessary to make changes to the Constitution from time to time. Article V spells out the ways such amendments can be proposed and ratified.

Article VI covers several topics. It states that the national government agrees to repay all of the debts that were incurred under the Articles of Confederation. This was critical to ensure support for the new government. It also states that the Constitution is the “supreme Law of the Land.” This section, known as the Supremacy Clause, means that federal law supersedes all state and local laws. When the laws conflict, federal law reigns supreme. In addition, it stipulates that all federal and state officials must take an oath swearing their allegiance to the Constitution. Also, no religious standard can be imposed on any official as a qualification for holding office.

Article VII stipulates that the Constitution would not take effect until ratified by at least nine states. Although the Constitution was signed by the framers on September 17, 1787, ratification did not occur until the following year.

The framers never meant for the Constitution to provide a complete and detailed blueprint for government. In general, the framers made broad statements and left it to political leaders to work out many of the specific details of governing. They also built in an amendment process, in Article V, that would allow for formal changes to the Constitution. They hoped that this flexibility would allow the Constitution and the government to endure.


APMacro: Unemployment Rate

GDP image
The Bureau of Labor Statistics (BLS) conducts a nationwide random survey each month to determine who is employed and who is not employed. In a series of questions it asks which members of the household are working, unemployed and looking for work, not looking for work, and so on. From the answers it determines an unemployment rate for the entire nation.

The BLS divides the total population into three groups. One group is made up of people under 16 years of age and people who are institutionalized. Such people are not considered potential members of the labor force. They are in mental hospitals or correctional institutions. A second group, labeled not in the work force is composed of adults who are potential workers but are not employed and are not seeking work. They are homemakers, full-time students, or retirees. The third group is the labor force. The labor force consists of people who are able and willing to work. Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force.

Labor Force = employed workers + unemployed workers

The unemployment rate is the percentage of the labor force unemployed:

Unemployment Rate = (unemployed / labor force) x 100

Unemployment that is excessive involves great economic and social costs. The basic cost of unemployment is forgone output. When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost. Unemployment above the natural rate means that society is operating at some point inside its production possibilities curve. Economists call this sacrifice of output a GDP gap, the difference between actual and potential GDP.

GDP gap = actual GDP – potential GDP

The GDP gap can be either negative, actual GDP < potential GDP, or positive, actual GDP > potential GDP. In the case of unemployment above the natural rate, it is negative because actual GDP falls short of potential GDP. Potential GDP is determined by assuming that the natural rate of unemployment prevails. The growth of potential GDP is simply projected forward on the basis of the economy’s normal growth rate of real GDP.  The higher the unemployment rate, the larger the GDP gap.

Economist Arthur Okun was the first to quantify the relationship between the unemployment rate and the GDP gap.

Okun’s law indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of 2 percent occurs.

With this information, we can calculate the absolute loss of output associated with any above natural unemployment rate.


Gov: Preamble

The Preamble is a single, long sentence that defines the broad purposes of the republican government created by the Constitution. It begins with the phrase “We the people,” signifying that power and authority in our system of government come from the people, not the states. The Preamble goes on to set various goals for the nation under the Constitution. These goals are expressed in a series of key phrases. “Form a more perfect union.” The framers of the Constitution wanted to ensure cooperation among the states, and between the states and the national government. “Establish justice.” The framers hoped to create a system of government based on fair laws that apply equally to all people. “Ensure domestic tranquility.” The framers wanted government to ensure peace and order. “Provide for the common defense.” The framers wanted the government to protect the nation against foreign enemies. “Promote the general welfare.” The framers hoped the government would ensure the well-being of the citizens. “Secure the blessings of liberty to ourselves and our posterity.” The framers hoped to guarantee freedom for Americans, then and in the future.