ch16 makro

© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair

C

H A

P T

E R

C H

A P

T E

R1616

Prepared by: Fernando Prepared by: Fernando Quijano and Yvonn QuijanoQuijano and Yvonn Quijano

Introduction to Introduction to MacroeconomicsMacroeconomics


MacroeconomicsMacroeconomics

• MacroeconomicsMacroeconomics deals with the deals with the economy as a whole. It studies the economy as a whole. It studies the behavior of economic aggregates behavior of economic aggregates such as aggregate income, such as aggregate income, consumption, investment, and the consumption, investment, and the overall level of prices.overall level of prices.

• Aggregate behaviorAggregate behavior refers to the behavior refers to the behavior of all households and firms together.of all households and firms together.


The Roots of MacroeconomicsThe Roots of Macroeconomics

• The The Great DepressionGreat Depression was a period of severe was a period of severe economic contraction and economic contraction and high unemployment that high unemployment that began in 1929 and began in 1929 and continued throughout the continued throughout the 1930s.1930s.


The Roots of MacroeconomicsThe Roots of Macroeconomics

• Classical economists applied Classical economists applied microeconomic models, or “market microeconomic models, or “market clearing” models, to economy-wide clearing” models, to economy-wide problems.problems.

• The failure of simple classical models The failure of simple classical models to explain the prolonged existence of to explain the prolonged existence of high unemployment during the Great high unemployment during the Great Depression provided the impetus for Depression provided the impetus for the development of macroeconomics.the development of macroeconomics.


Recent Macroeconomic HistoryRecent Macroeconomic History

• In 1936, John Maynard Keynes In 1936, John Maynard Keynes published published The General Theory of The General Theory of Employment, Interest, and MoneyEmployment, Interest, and Money..

• Keynes believed governments could Keynes believed governments could intervene in the economy and affect intervene in the economy and affect the level of output and employment.the level of output and employment.

• Fine-tuningFine-tuning was the phrase used by was the phrase used by Walter Heller to refer to the Walter Heller to refer to the government’s role in regulating government’s role in regulating inflation and unemployment.inflation and unemployment.


Recent Macroeconomic HistoryRecent Macroeconomic History

• The use of Keynesian policy to fine-The use of Keynesian policy to fine-tune the economy in the 1960s, led tune the economy in the 1960s, led to disillusionment in the 1970s and to disillusionment in the 1970s and early 1980s.early 1980s.

• StagflationStagflation occurs when the overall occurs when the overall price level rises rapidly (inflation) price level rises rapidly (inflation) during periods of recession or high during periods of recession or high and persistent unemployment and persistent unemployment (stagnation).(stagnation).


Macroeconomic ConcernsMacroeconomic Concerns

• Three of the major concerns of Three of the major concerns of macroeconomics are:macroeconomics are:

• InflationInflation

• Output growthOutput growth

• UnemploymentUnemployment


InflationInflation

• InflationInflation is an increase in the overall is an increase in the overall price level.price level.

• HyperinflationHyperinflation is a period of very is a period of very rapid increases in the overall price rapid increases in the overall price level. Hyperinflations are rare, but level. Hyperinflations are rare, but have been used to study the costs have been used to study the costs and consequences of even moderate and consequences of even moderate inflation.inflation.


Output GrowthOutput Growth

• The The business cyclebusiness cycle is the cycle of is the cycle of short-term ups and downs in the short-term ups and downs in the economy.economy.

• The main measure of how an The main measure of how an economy is doing is aggregate economy is doing is aggregate output:output:

• Aggregate outputAggregate output is the total quantity is the total quantity of goods and services produced in an of goods and services produced in an economy in a given period.economy in a given period.


Output GrowthOutput Growth

• A A recessionrecession is a period during which is a period during which aggregate output declines. Two aggregate output declines. Two consecutive quarters of decrease in consecutive quarters of decrease in output signal a recession.output signal a recession.

• A prolonged and deep recession A prolonged and deep recession becomes a becomes a depressiondepression..

• The size of the growth rate of output The size of the growth rate of output over a long period is also a concern of over a long period is also a concern of macroeconomists and policy makers.macroeconomists and policy makers.


UnemploymentUnemployment

• The The unemployment rateunemployment rate is the is the percentage of the labor force that is percentage of the labor force that is unemployed.unemployed.

• The unemployment rate is a key The unemployment rate is a key indicator of the economy’s health.indicator of the economy’s health.

• The existence of unemployment The existence of unemployment seems to imply that the aggregate seems to imply that the aggregate labor market is not in equilibrium. labor market is not in equilibrium. Why do labor markets not clear Why do labor markets not clear when other markets do?when other markets do?


Government in the MacroeconomyGovernment in the Macroeconomy

• There are three kinds of policy There are three kinds of policy that the government has used to that the government has used to influence the macroeconomy:influence the macroeconomy:

1.1. Fiscal policyFiscal policy

2.2. Monetary policyMonetary policy

3.3. Growth or supply-side policiesGrowth or supply-side policies


Government in the MacroeconomyGovernment in the Macroeconomy

• Fiscal policyFiscal policy refers to government refers to government policies concerning taxes and policies concerning taxes and expenditures.expenditures.

• Monetary policyMonetary policy consists of tools used consists of tools used by the Federal Reserve to control the by the Federal Reserve to control the money supply.money supply.

• Growth policiesGrowth policies are government policies are government policies that focus on stimulating aggregate that focus on stimulating aggregate supply instead of aggregate demand.supply instead of aggregate demand.


The Components of the MacroeconomyThe Components of the Macroeconomy

• The The circular flow circular flow diagramdiagram shows the shows the income received and income received and payments made by payments made by each sector of the each sector of the economy.economy.


The Components of the MacroeconomyThe Components of the Macroeconomy

• Everyone’s Everyone’s expenditures go expenditures go somewhere. Every somewhere. Every transaction must transaction must have two sides.have two sides.


The Three Market ArenasThe Three Market Arenas

• Households, firms, the government, and the rest of the Households, firms, the government, and the rest of the world all interact in the goods-and-services, labor, and world all interact in the goods-and-services, labor, and money markets.money markets.



• Households and the government purchase Households and the government purchase goods and services (goods and services (demanddemand) from firms in ) from firms in the the goods-and services marketgoods-and services market, and firms , and firms supplysupply to the goods and services market. to the goods and services market.

• In the In the labor marketlabor market, firms and government , firms and government purchase (demand) labor from households purchase (demand) labor from households (supply).(supply).

• The total supply of labor in the economy The total supply of labor in the economy depends on the sum of decisions made by depends on the sum of decisions made by households.households.



• In the In the money marketmoney market—sometimes called —sometimes called the the financial marketfinancial market—households purchase —households purchase stocks and bonds from firms.stocks and bonds from firms.

• Households Households supplysupply funds to this market in funds to this market in the expectation of earning income, and also the expectation of earning income, and also demanddemand (borrow) funds from this market. (borrow) funds from this market.

• Firms, government, and the rest of the world Firms, government, and the rest of the world also engage in borrowing and lending, also engage in borrowing and lending, coordinated by financial institutions.coordinated by financial institutions.


Financial InstrumentsFinancial Instruments

• Treasury bonds, notes, and billsTreasury bonds, notes, and bills are promissory notes issued by the are promissory notes issued by the federal government when it borrows federal government when it borrows money.money.

• Corporate bondsCorporate bonds are promissory are promissory notes issued by corporations when notes issued by corporations when they borrow money.they borrow money.


Financial InstrumentsFinancial Instruments

• Shares of stockShares of stock are financial are financial instruments that give to the holder a instruments that give to the holder a share in the firm’s ownership and share in the firm’s ownership and therefore the right to share in the therefore the right to share in the firm’s profits.firm’s profits.

• DividendsDividends are the portion of a are the portion of a corporation’s profits that the firm corporation’s profits that the firm pays out each period to its pays out each period to its shareholders.shareholders.


The Methodology of MacroeconomicsThe Methodology of Macroeconomics

• Connections to microeconomics:Connections to microeconomics:

• Macroeconomic behavior is the Macroeconomic behavior is the sum of all the microeconomic sum of all the microeconomic decisions made by individual decisions made by individual households and firms. We cannot households and firms. We cannot understand the former without understand the former without some knowledge of the factors some knowledge of the factors that influence the latter.that influence the latter.


Aggregate Supply andAggregate Supply andAggregate DemandAggregate Demand

• Aggregate demandAggregate demand is the is the total demand for goods and total demand for goods and services in an economy.services in an economy.

• Aggregate supplyAggregate supply is the is the total supply of goods and total supply of goods and services in an economy.services in an economy.

• Aggregate supply and Aggregate supply and demand curves are more demand curves are more complex than simple complex than simple market supply and demand market supply and demand curves.curves.


Expansion and Contraction:Expansion and Contraction:The Business CycleThe Business Cycle

• An An expansionexpansion, or , or boomboom, is , is the period in the business the period in the business cycle from a trough up to a cycle from a trough up to a peak, during which output peak, during which output and employment rise.and employment rise.

• A A contractioncontraction, , recessionrecession, , or slump is the period in or slump is the period in the business cycle from a the business cycle from a peak down to a trough, peak down to a trough, during which output and during which output and employment fall.employment fall.


Real GDP, 1900-2000Real GDP, 1900-2000


Real GDP, 1970 I-1997 II Real GDP, 1970 I-1997 II


Unemployment Rate, 1970 I-1997 IIUnemployment Rate, 1970 I-1997 II


Percentage Change in the GDP Price Index Percentage Change in the GDP Price Index (Four-Quarter Average), 1970 I-1997 II(Four-Quarter Average), 1970 I-1997 II

ch16 makro

Documents