The first four chapters laid the foundation for economic study. The concepts are needed in both microeconomic and macroeconomic disciplines as well as in economic development, money and banking, economic finance, economic research and so forth.

Macroeconomics You will now begin your journey into the world of

Chapter 5 Jobs, Inflation, and Interest Rates

Output over time In chapter 1 you learned the meaning of gross domestic product. You also learned the distinction between real and nominal measurements. Remember Real GDP is a measurement of the value of all final goods and services produced in a country during some period of time and adjusted for inflation.

There is no doubt that you have heard the terms economic growth, economic fluctuations and business cycles. But, do you know what they mean?

Economic Growth *An economy is experiencing economic growth if it is experiencing an upward trend in real GDP. *An increase in real GDP represents an expansion in the economy over some period of time.

Economic fluctuations Economic fluctuations represent increases and decreases in real GDP in the short-term within a long-term growth trend. Example: Real GDP may represent an economic growth over a five year period. This does not mean that each of the five years had growth. The second and fourth year may have experienced a decrease in economic activity. That decrease is the economic fluctuation within the 5 years.

Business cycles: The short-term fluctuations in real GDP is also referred to as the business cycles The Business cycle represents short-term fluctuations in real GDP and employment.

Common phases in the business cycle. Peak--The highest point in real GDP. Recession--A decline in real GDP that lasts for more than six months. Trough--The lowest point of real GDP. Expansion--The period between a trough and the next peak. Recovery--the early portion of an economic expansion.

Peak Recession Trough Expansion Real GDP Time 0

Recession vs Depression Basically a depression is a long sustained recession. There is no set length of time when a recession becomes a depression.

One might say that a recession is when your neighbor is out of work and a depression is when you are out of work. Remember there is no formal definition of a depression.

The success of an economy or economic policy may be measured by various indicators. Such as:

Labor productivity--measures the output per hour of work. Unemployment rate--measures the percent of labor force that is unemployed. Inflation rate--measures the increase in the overall price level over a given period of time. Interest rate--the amount received per dollar loaned per year.

Remember that Macroeconomics is the study of society as a whole. Therefore it is important to understand supply and demand as aggregates. ›Aggregate supply is the total value of all goods and services produced in the economy given the available resources. ›Aggregate demand is the total demand for goods and services by consumers, businesses, governments, and foreigners.

Production function Is the relationship that describes output as a function of its inputs. Real GDP = F (Labor, Capital, Technology) This production function states that real GDP is a function of labor, capital, and technology. If one of these inputs contributions change, then Real GDP will change.

Two Government Policies Fiscal Government plans concern: Taxation Borrowing Spending Monetary The Government plans concern: the Money Supply Interest Inflation

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