An Introduction to Macroeconomics Where the telescope ends, the microscope begins. Which of the two has the grander view? VICTOR HUGO © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Drawing a Line Drawing a line between macroeconomics and microeconomics Microeconomics Decisions of individual units No matter how large Macroeconomics Behavior of entire economies No matter how small Economic aggregates © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Drawing a Line Aggregation Composition of demand and supply Combine many individual markets into one overall market Composition of demand and supply In various markets Important for microeconomics issues Not important for macroeconomics issues During economic fluctuations Markets – move up or down together © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Drawing a Line Macroeconomics Microeconomics Assume most details Resource allocation and income distribution Relatively unimportant Microeconomics Ignore macroeconomics issues Focus on individual markets Allocate resources Distribute income © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Macroeconomics Aggregate demand curve Aggregate supply curve Quantity of domestic product that is demanded at each possible value of the price level Aggregate supply curve Quantity of domestic product that is supplied at each possible value of the price level © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 1 Two interpretations of a shift in the demand curve D1 Price Q0 Quantity Quantity (a) (b) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Macroeconomics Inflation Recession Sustained increase in the general price level Recession A period of time during which the total output of the economy declines Production falls People lose jobs Leftward shift of aggregate demand curve © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 2 An Economy Slipping into a Recession S E P0 Price Level B P2 D0 Price Level D2 E P0 Q0 B P2 Q2 Domestic Product © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Macroeconomics Macroeconomists study Inflation Recession and unemployment Economic growth © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 3 Economic Growth S0 S1 C Price Level E D1 D0 Q0 Q1 Domestic Product © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Gross Domestic Product Gross domestic product (GDP) Sum of the money values of all final goods and services Produced in the domestic economy and sold on organized markets During a specified period of time, usually a year © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Gross Domestic Product Nominal GDP GDP in current dollars Calculated by valuing all outputs at current prices Real GDP Calculated by valuing outputs of different years at common prices Better measure than nominal GDP of changes in total production © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Gross Domestic Product GDP - particular year Add up money value of things Goods and services Produced within the year Final goods and services Production: geographic boundaries of U.S. Organized markets © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Gross Domestic Product Final goods and services Purchased by their ultimate users Intermediate good - purchased For resale For use in producing another good © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Gross Domestic Product Limitations of GDP Not a measure of the nation’s economic well-being Includes only market activity Places no value on leisure Counted: “Bads” and “Goods” Ecological costs are not netted out of the GDP © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster U.S. economy Growth – with fluctuations Macroeconomic fluctuations Business cycles Real GDP per capita Ratio of real GDP divided by population © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4 Nominal GDP, Real GDP, and Real GDP per Capita since 1959 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 5 The Growth Rate of U.S. Real Gross Domestic Product since 1870 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Inflation Sustained increase in the general price level Deflation Sustained decrease in the general price level © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 6 The Inflation Rate in the United States since 1870 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster The Great Depression, 1929-1933 Decline in economic activity Rapid deflation Production declined 30% Business investment ceased Unemployment rate Increased from 3% to 25% World-wide event © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster The Great Depression, 1929-1933 Revolution in economic thought Before: economy corrects itself After: decrease in aggregate demand Monetary & fiscal policy Ended: early 1940s © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster From WWII to 1973 Increased government spending Increased aggregate demand Accidental fiscal policy Price controls Shortage: consumer goods 1960s – strong growth Vietnam war – increased spending Inflation and high unemployment Wage and price controls © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Fiscal policy Government spending and taxation Used to steer aggregate demand Stagflation Inflation While economy Growing slowly (“stagnating”) Or recession © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster The Great Stagflation, 1973-1980 OPEC – 1973 oil prices quadrupled Poor harvests Recession Inflation rate: 12% High unemployment Stagflation Inward shift of aggregate supply © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster The Great Stagflation, 1973-1980 Economy recovered Government actions Natural economic forces 1979 – OPEC soaring oil prices Stagflation Inflation: 16% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 7 The Effects of an Adverse Supply Shift S1 S0 A Price Level E Real GDP © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Reaganomics and its aftermath Recovery underway High inflation Federal Reserve Monetary policy, High interest rate Monetary policy Actions – Federal Reserve Change interest rates Influence aggregate demand © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Reaganomics and its aftermath 1981-1982 recession Large budget deficits Recovery started 1982-1983 President Bush Inflation Deficit-reduction package Spike in oil prices 1990-1991 recession © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Clintonomics: deficit reduction and the “New Economy” Deficit-reduction package, 1993 & 1997 Tax increase & spending cuts Large surplus Economy boomed Lower inflation Aggregate supply curves Pushed outward – rapid pace, 1996 – 1998 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 8 The Effects of a Favorable Supply Shift S0 S1 S2 C B D1 S0 S1 Price Level D0 S2 C B E Real GDP © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Tax cuts and the Bush economy 2001 recession, the first in 10 years Tax cut 2001 Budget deficit Burst of government spending War on terror Aggregate demand – shift outward Federal Reserve Lowered interest rate © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Obamanomics and the Great Recession January 2009, economy was sinking Jobs - disappearing at a rapid pace More tax cuts A burst of federal spending Large-scale aid to state and local governments © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economy on a Roller Coaster Obamanomics and the Great Recession Bush, Obama administrations, the Fed Variety of unprecedented emergency measures - to rescue the collapsing financial system Summer 2009, the Great Recession was over Economy started growing again High unemployment © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Macroeconomic Stabilization Stabilization policy Government programs designed to prevent or shorten recessions And to counteract inflation To stabilize prices © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Macroeconomic Stabilization Combating unemployment Increase aggregate demand Government - Fiscal policy Increase spending and / or cut taxes Federal Reserve - Monetary policy Lower interest rates Increase output Reduce unemployment Raise prices © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 9 Stabilization Policy to Fight Unemployment S0 A Price Level E D1 S0 Price Level D0 A E Increase in output Real GDP © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Macroeconomic Stabilization Combating inflation Decrease aggregate demand Government - Fiscal policy Cut spending and / or increase taxes Federal Reserve - Monetary policy Increase interest rates Decrease inflation (decrease prices) Decrease output Increase unemployment © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 10 Stabilization Policy to Fight Inflation S E Price Level B D0 Price Level D2 E Decrease in prices B Real GDP © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stabilization policy Prewar data Fluctuations – unmanaged economy Booms & recessions “Natural” economic reasons Little government intervention © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stabilization policy Postwar data Economy - managed by government policy Successfully or unsuccessfully Recessions - less severe More inflation-prone © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.