Basics of Macroeconomics peak trough recovery contraction Dr. Dennis Foster

Micro – focus on individual/firm. Economics: A framework for understanding how we cope with scarcity. Micro – focus on individual/firm. Macro – focus on the overall economy.

Macroeconomic problems Unemployment of resources. Economic growth is slow, sluggish, negative. Rising prices; inflation.

Why is Inflation a problem? Milton Friedman … Inflation is always and everywhere a monetary phenomenon. Who controls the money supply? The Federal Reserve System (the government!)

Macroeconomic goals Full employment of resources. Sustained economic growth. Price stability. How are these goals accomplished? --through government policy.

Business Cycles Macro goals are interrelated: peak contraction trough recovery contraction Change in GDP over time. time line Employment high falling low rising Prices stable Growth negative

Business Cycles - Theories External shocks Population pressures [Malthus] Innovation [Schumpeter] Underconsumption [Marx] Erratic anomalies [Classical] Overproduction [Keynesian] Central banking [Austrian]

The PPF: A Macro Model of Economy Production Possibilities Frontier 25 35 41 46 49 50 Gallons of Wine G F Tons of Wheat A B C D E I H 20 40 60 80 100 120 [aka, The Production Possibilities Curve] 1. What is the cost in going from A to B, B to C, C to D, et al.? 2. What is the cost in going from G to F, F to E, et al.? 3. What point is best? 4. What is wrong with H? 5. Can we produce at I? Can we consume there? Reference: Investopedia on the PPF: http://www.investopedia.com/terms/p/productionpossibilityfrontier.asp

Production Possibilities Frontier What does it show us? Scarcity Choice Unemployment Economic growth What doesn’t it show us? What/How/For Whom to produce Inflation How variables are related (theory)

Basics of Macroeconomics peak trough recovery contraction Dr. Dennis Foster