Macroeconomics

Since the failed attempt to control inflation by targeting the growth of monetary aggregates in the late 1970s and early 1980s, the Federal Reserve (the Fed) has explored the use of various policy guides, including price indices, gold prices, and indicators of future price levels (Wray 2004). Each was used, with varying success, to assist the Fed in carrying out its dual mandate: the promotion of price stability and maximum employment (Bell-Kelton 2006).

National income accounting is a measure of the economy's overall performance. It does for the economy as a whole what private accounting does for the individual firm or for the individual household (McConnell, Brue 2004). The Bureau of Economic Analysis (BEA), compiles the National Income and Product Accounts NIPA), for the U.S. economy (McConnell, Brue 2004). Through this measure economists and policymakers are able to track production levels at regular intervals, create policies for maintaining and protecting a healthy economy, and review the economy for growth, consistency or decline. The primary measure of the economy's performance is its annual total output of goods and services or its aggregate output (McConnell, Brue 2004).

Aggregate output is labeled gross domestic product (GDP), the total market value of all final goods and services produced in a year (McConnell, Brue 2004). The BEA determines the GDP as well. Monetary policies can affect the GDP. The way banks lend money, how people obtain credit or spend money and the distribution of goods and services domestically and globally are affected as well. The Federal Reserve implements monetary policy and the federal government implements fiscal policy in the U.S.

The Fed can use three tools to set their monetary policy. The tools work by changing the amount of excess reserves in the banking system (McConnell, Brue 2004). Conducting open-market operations (the buying and selling of government bonds to the public and banks), changing the reserve ratio (percentage of commercial bank deposit liabilities required as reserves) and changing of the discount rate (McConnell, Brue 2004). The Fed utilizes the open-market operations and changing of the discount rate the most.

GDP can be expressed in two general ways: as the value of output by summing all expenditures on that output (Expenditure Approach) or by (Income Approach) adding up all the components of income arising from the production of that output (McConnell, Brue 2004). The expenditure method takes into account:

personal consumption expenditure (C)

gross private domestic investment (Ig)

government purchases (G)

net exports (Xn)

GDP= C+Ig+G+Xn

The income method to GDP sums:

compensation to employees

rent

interest

proprietor's income

corporate profits

To that amount is added indirect business taxes, consumption of fixed capital and net foreign factor income to measure GDP (McConnell, Brue 2004).

The GDP accounting is a highly useful and accurate measure of the economy's performance,

but it has several limitations in its measurement. GDP does not account for the services of homemakers and carpenters who repair their own homes (McConnell, Brue 2004). This impacts as an understating of the nations total output. Leisure activity within the labor force is not accounted for as well. The average workweek hours has decline significantly since the 1900s. This value in leisure services cannot be accounted for. Lastly, the underground economy of people not reporting any or all of their wages. People paid in cash or using barter as a method of payment account for roughly 8 percent of the recorded GDP in the United States (McConnell, Brue 2004).

Unemployment and inflation are twin problems that rise from the business cycle

(McConnell, Brue 2004). The unemployment rate is measured by identifying those who are eligible and available to work (McConnell, Brue 2004). The population is divided into three sectors. People 16 years of age and younger, institutionalized (correctional or mental), adults who can work, but choose not to and the labor force of the population

(McConnell, Brue 2004). Those unemployed but actively seeking employment are a part of the labor force group. This last group comprises about 50% of the total population.

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

Unemployment rate = unemployed/labor force X 100

The Bureau of Labor Statistics (BLS) conducts the statistical analysis on a monthly basis for the employed and unemployed. The gap between those who can work and the lack of jobs for work creates a loss of output. The production of goods and services cease to exist

(McConnell, Brue 2004).

Unemployment rates can be examined through several factors of origin. Occupation, age, race and ethnicity, gender, education and duration all have an effect on the outcome of the rate. Lower skilled workers have a higher unemployment rate than skilled. Teenagers have a higher rate than adults. Their affinity to a particular job is more erratic than an adult. Lack of education, lower quality skills and discrimination factor into a high rate of unemployment