Macro Outcomes Macroeconomics is the study of the aggregate economy Macro outcomes include: Output–the total volume of goods and services produced (real GDP) Jobs–the levels of employment and unemployment Prices–the average prices of goods and services There are five basic macro outcomes. Output refers to the total volume of goods and services produced or real GDP. Jobs means the levels of employment and unemployment. Prices are the average prices of goods and services. LO-1

Figure 11.1

Macro Outcomes Macro outcomes include: Growth–the year-to-year expansion in production capacity International balances–the international value of the dollar; trade and payment balances with other countries Growth is the year-to-year expansion in production capacity. International balances refers to the international value of the dollar or the trade and payment balances with other countries. LO-1

Classical Theory and Self-Adjustment According to the classical view, the economy self-adjusts to deviations from its long-term growth trend. Classical theory was the predominant theory prior to the 1930s. Classical economic theory was the prevalent theory prior to the 1930s; it assumes the economy self-adjusts to deviations from its long-term growth trend. LO-2

The Keynesian Revolution The Great Depression was a stunning blow to Classical economists. John Maynard Keynes provided an alternative to the Classical Theory. Keynes argued that the Great Depression was not a unique event. It would recur if reliance on the market to “self-adjust” continued. The Great Depression was a stunning blow to Classical economists. John Maynard Keynes <CANES> provided an alternative to the Classical Theory. He was a British economist totally opposed to the Classical viewpoint. His views came to be known as Keynesian <CANE-Z-IN> economics. Keynes argued that the Great Depression was not a unique event. It would recur if reliance on the market to “self-adjust” continued. LO-2

The Aggregate Supply Demand Model: Aggregate Demand Any influence on macro outcomes must be transmitted through supply or demand. Aggregate demand is the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus. Any influence on macro outcomes must be transmitted through supply or demand. Aggregate demand is the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus. Aggregate means total, so aggregate demand is the total demand for all goods and services in the economy. LO-3

Aggregate Demand Curve The Aggregate Demand curve is downward sloping for three reasons: Real balances effect Foreign trade effect Interest-rate effect The aggregate demand curve is downward sloping for three reasons: the real balances effect, the foreign trade effect, and the interest-rate effect. LO-3

Figure 11.3

Aggregate Supply Aggregate supply is the total quantity of output producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus. The aggregate supply curve is upward-sloping We expect the rate of output to increase when the price level rises. Aggregate supply is the total quantity of output producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus. Aggregate supply is the total supply of all goods and services in the economy. LO-3

Figure 11.4

Macro Equilibrium Aggregate supply and demand curves summarize the market activity of the whole (macro) economy. Macro equilibrium–the unique combination of price level and real output that is compatible with both aggregate demand and aggregate supply. It is the only price-output combination mutually compatible with both buyers’ and sellers’ intentions. Aggregate supply and demand curves summarize the market activity of the whole (macro) economy. Macro equilibrium is the unique combination of price level and real output that is compatible with both aggregate demand and aggregate supply. It is the only price-output combination mutually compatible with both buyers’ and sellers’ intentions. LO-3

Figure 11.5

Undesirable Outcomes Full-employment GDP–the rate of real output (GDP) produced at full employment Unemployment–the inability of labor-force participants to find jobs. Inflation–an increase in the average level of prices of goods and services. Full-employment GDP is the rate of real output (GDP) produced at full employment. Unemployment is the inability of labor-force participants to find jobs. Inflation is an increase in the average level of prices of goods and services. Unemployment and inflation are the macroeconomic problems discussed earlier. LO-4

Shifts of AS and AD A leftward shift of the aggregate supply curve results in higher price levels and less output. A leftward shift of the aggregate demand curve results in lower price levels and less output. A leftward shift of the aggregate supply curve results in higher price levels and less output. A leftward shift of the aggregate demand curve results in lower price levels and less output. LO-4

Shift Factors: Demand Shifts The aggregate demand curve might shift as a result of changes in: Consumer sentiment. Taxes on consumer income. Interest rates. The aggregate demand curve might shift as a result of changes in consumer sentiment, taxes on consumer income, or interest rates. Specifically, negative consumer confidence, higher taxes, and higher interest rates can decrease aggregate demand and shift the AD curve to the left. LO-4

Shift Factors: Supply Shifts The aggregate supply curve might shift as a result of changes in: The price or availability of raw materials. Business taxes. Environmental or workplace regulations. The aggregate supply curve might shift as a result of changes in the price or availability of raw materials, business taxes, or environmental or workplace regulations. Specifically, higher oil prices, higher business taxes, or stricter environmental regulations can decrease aggregate supply and shift the AS curve to the left. LO-4

Keynesian Theory Keynes argued that if people demand a product, producers will supply it. If aggregate spending isn't sufficient, some goods will remain unsold and some production capacity will be idled. Keynes argued that if people demand a product, producers will supply it. If aggregate spending isn’t sufficient, some goods will remain unsold and some production capacity will be idled. Keynes supported government intervention to correct the shortcomings of the free market. LO-5

Monetary Theory Monetary theories focus on the control of money and interest rates as mechanisms for shifting the aggregate demand curve. Money and credit affect the ability and willingness of people to buy goods and services. Monetary theories focus on the control of money and interest rates as mechanisms for shifting the aggregate demand curve. Money and credit affect the ability and willingness of people to buy goods and services. So, monetary theories deal with changing the money supply and interest rates. LO-5

Supply-Side Theories A decline in aggregate supply causes output and employment to decline. The focus of supply-side theory is to get more output by shifting the AS curve to the right. A decline in aggregate supply causes output and employment to decline. The focus of supply-side theory is to get more output by shifting the AS curve to the right. Like its name implies, supply-side economics focuses on aggregate supply. LO-5

Figure 11.8

Fiscal Policy Fiscal policy is the use of government taxes and spending to alter macro-economic outcomes. Fiscal policy is conducted by Congress and the President. Fiscal policy is the use of government taxes and spending to alter macroeconomic outcomes. Fiscal policy is conducted by Congress and the President. LO-5

Monetary Policy Monetary policy is the use of money and credit controls to influence macro-economic activity. The Federal Reserve is the regulatory body that controls the supply of money. Monetary policy is the use of money and credit controls to influence macroeconomic activity. The Federal Reserve is the regulatory body that controls the money supply. Monetary policy deals with the money supply and interest rates. LO-5

Supply-Side Policy Supply-side policy is the use of tax rates, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services. Supply-side policy is the use of tax rates, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services. President Ronald Reagan implemented supply-side economics with his tax cuts in the 1980s. LO-5

The Changing Choice of Policy Levers: 2000s The fiscal restraint of the late 1990s helped the federal budget move from deficits to surpluses. In 2001, ‘02, and ‘03, Congress cut taxes in an attempt to deal with a recession. This fiscal stimulus shifted the AD curve to the right. Starting in 2007, the Fed cut interest rates, and in 2009 President Obama pushed hard on the fiscal-policy lever. The fiscal restraint of the late 1990s helped the federal budget move from deficits to surpluses. In 2001, ’02, and ’03, Congress cut taxes in an attempt to deal with a recession. This fiscal stimulus shifted the AD curve to the right. The Fed started reducing interest rates in 2007, and in 2009 President Obama pushed hard on the fiscal-policy lever. LO-5