Macroeconomics An Introduction

Microeconomics and Macroeconomics Microeconomics: Study of the behavior of economic units such and households and firms Microeconomics: Study of the behavior of economic units such and households and firms Macroeconomics: Study of economic aggregates such as national income and the overall price level Macroeconomics: Study of economic aggregates such as national income and the overall price level

PPC Revisited Good a Good B 0 U F G H Macroeconomic Objectives Full employment Stable Prices Steady Growth Achieving macroeconomic goals in a market economy The market’s self-correcting mechanism Imperfect and slow market adjustments

Business Cycles The Great Depression: 1929 The Great Depression: 1929 The Keynesian Solution The Keynesian Solution The Act 1946: The Federal government is to intervene in the economy to prevent declines in output and employment The Act 1946: The Federal government is to intervene in the economy to prevent declines in output and employment

Recent Macroeconomic Experiences The 1950s: The Post-war recovery The 1950s: The Post-war recovery The1960s: Continued growth with some inflation The1960s: Continued growth with some inflation The 1970s’ stagflation The 1970s’ stagflation Controlling inflation and supply side economics in the 1980s Controlling inflation and supply side economics in the 1980s Prosperity in 1990s (Low inflation and low unemployment) Prosperity in 1990s (Low inflation and low unemployment) Slow down in ; mild recovery in the following years Slow down in ; mild recovery in the following years

Macroeconomic Concerns Unemployment Unemployment The unemployment rate is often regarded as the key indicator of the health of the economy. The unemployment rate is often regarded as the key indicator of the health of the economy. Inflation/deflation Inflation/deflation Although high inflation (or sever deflation) has not been a common occurrence in the US some other countries have had long period of very high inflation. Although high inflation (or sever deflation) has not been a common occurrence in the US some other countries have had long period of very high inflation. Slow economic growth Slow economic growth Recessions are periods (lasting two consecutive quarters) during which aggregate output declines. Recessions are periods (lasting two consecutive quarters) during which aggregate output declines. A prolonged deep recession is called “depression.” A prolonged deep recession is called “depression.”

Macroeconomic Policy Tools Fiscal policy Fiscal policy Taxation Taxation Government expenditures Government expenditures Trade policies Trade policies Monetary policy Monetary policy Money and interest rates Money and interest rates Foreign exchange policies Foreign exchange policies Growth or supply-side policy Growth or supply-side policy

Business Cycle GDP: A measure of economic output Nominal GDP Nominal GDP Real GDP Real GDP Potential (real) GDP Potential (real) GDP Business cycle: trough – expansion – peak – recession Business cycle: trough – expansion – peak – recession

Business Cycle Time RGDP Trough Expansion Peak Recession