Introduction to Macroeconomics Lesson 22

What is Macroeconomics? Macroeconomics is the study and application of managing the overall economy for everyone. Managing business cycles to reduce, mitigate, or eliminate recessions or depressions. Maintain a stable currency Promote employment and a “fair” distribution of societies goods and services

Business Cycles Macroeconomics is primarily concerned with the Business Cycle. The business cycle is the time from a peak in the economy to the next peak. The business cycle is Peak - Recession –Trough - Expansion – Peak Recession - GDP is falling Expansion - at some point the economy (hopefully) recovers and begins to grow again Business cycles can vary wildly from 18 months to over ten years A Recession is a period of two consecutive quarters (3 months each) of contraction or downturn in the economy A Depression is an unusually long and severe recession (no actual definition)

Employment, Unemployment and the Business Cycle One of the principle effects of a recession is a loss of employment of many people, from the hundreds of thousands to millions of jobs lost. Employment is the number of people currently working Unemployment is people looking for work The Labor Force is the aggregate of Employed people and Unemployed people The Unemployment Rate is the percentage of the Labor Force that unemployed What is a “good” unemployment rate?

Aggregate Output and the Business Cycle While employment and unemployment are central concerns during contractions and expansions, another crucial factor is Output Output is the goods and services created Aggregate Output is the combined total of all goods and services Aggregate output normally falls during recession and increases during expansion How do Aggregate Output and Unemployment relate to each other?

Inflation, Deflation, and Price Stability Inflation is the rise in prices over time In 1972, a candy bar was $0.25, today the same bar would cost $1.25. This means that even though wages are rising, the price of goods is also rising. Are wages keeping up? Deflation is the drop in prices over time While this may seem desirable, what are the consequences? Rising or falling prices influence people to save or to spend. How does this effect the economy? Price Stability is a goal because it provides a more stable economy. Why? (Think future spending decisions)

Economic Growth Economic Growth is the long term rise in aggregate output. This means that more goods and services are produced, generating better living conditions. Imagine what it would be like with no electricity. The state of Tennessee did not have electricity for most of its population until after WWII. Economic growth means access to autos, washing machines, computers, cell phones, etc.