Chapter 6 Macroeconomics the Big Picture 12-1 Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.

John Maynard Keynes  1936 Keynesian Economics  Government Can Help a Depressed Economy Through Monetary and Fiscal Policies.

Monetary Policy  Monetary Policy- The Government uses Changes in the Quantity of Money to Alter Interest Rates and Affect Overall Spending

Fiscal Policy The Setting of The Level of Government Spending and Taxation By Government Policymakers.

The Influence of Monetary and Fiscal Policy on Aggregate Demand  Many Factors Influence Aggregate Demand Besides Monetary and Fiscal Policy.  In Particular, Desired Spending By Households and Business Firms Determines The Overall Demand For Goods and Services.

Fiscal Policy and Aggregate Demand  Fiscal Policy Refers To The Government’s Choices Regarding The Overall Level of Government Purchases or Taxes.  Fiscal Policy Influences Saving, Investment, and Growth In The Long Run.  In The Short Run, Fiscal Policy Primarily Affects The Aggregate Demand.

Fiscal Policy  Fiscal policy is the manipulation of the federal budget to attain price stability, relatively full employment, and a satisfactory rate of economic growth  To attain these goals, the government must manipulate its spending and taxes 12-3 Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.

 There was no such thing as fiscal policy until John Maynard Keynes invented it in the 1930s  He maintained that  The only way out of the Depression was to boost aggregate demand by increasing government spending  If we ran a big enough budget deficit, we could jump-start the economy and, in effect, spend our way out of the depression Putting Fiscal Policy into Perspective 12-4 Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.

When Firms Fall on Hard Times They Cut Back on Production and Employees. This Lowers The Real GDP and Incomes. If The Fall in Income and The Rise in Unemployment is Moderate It Is Called a Recession, If Severe It Is Called a Depression.

Recession A Period of Declining Real Income and Rising Unemployment.

Depression A Severe Recession.

Economic Fluctuations Are Normal and Occur in Every Country and Economy.

Let Us Look At These Fluctuations in Terms of Real GDP, Investment Spending and The Unemployment Rate Since Note: That There is No Discernable Pattern.

In The Following Figures Recessions Are Denoted As The Shaded Areas.

Figure 1 A Look At Short-Run Economic Fluctuations (a) Real GDP Billions of 2000 Dollars ,000 4,000 6,000 8,000 $10,000 3,000 5,000 7,000 9,000 Real GDP

Figure 1 A Look At Short-Run Economic Fluctuations (b) Investment Spending Billions of 2000 Dollars ,000 $1,500 Investment Spending

Figure 1 A Look At Short-Run Economic Fluctuations (c) Unemployment Rate Percent of Labor Force % Unemployment Rate

3 Key Facts About Economic Fluctuations  Fact 1: Economic Fluctuations Are Irregular and Unpredictable.  Fact 2: Most Macroeconomic Quantities Fluctuate Together.  Fact 3: As Output Falls, Unemployment Rises.

Fact 1: Economic Fluctuations Are Irregular and Unpredictable. Fluctuations in The Economy Are Called Business Cycles. When Times Are Good Businesses Expand and When They Are Bad They Contract.

Business Cycles Fluctuations In Economic Activity, Such As Employment and Production.

Important Note: These Business Cycle Fluctuations Are Unpredictable and Follow No Regular Pattern.

Fact 2: Most Macroeconomic Quantities Fluctuate Together. When Real GDP Falls in a Recession So Does Personal Income, Corporate Profits, Consumer Spending, Investment Spending, Production, Home Sales, Auto Sales and Other Items.

When Economic Conditions Deteriorate, Much of The Decline is Attributable To Reductions in Investment Spending Such As On New Factories, Housing, Equipment and Inventories.

Fact 3: As Output Falls, Unemployment Rises. When Firms Choose To Produce A Smaller Quantity of Goods and Services, They Lay Off Workers, Increasing The Unemployment.

In Each of The Recessions, The Unemployment Rate Rose Substantially. When The Recession Ends and The Real GDP Starts To Expand, The Unemployment Rate Gradually Declines. A Normal Unemployment Rate is 5-6 %.

Long-Run Economic Growth  Long-run Economic Growth is the Sustained Upward Trend in the Economy’s Output Over Time

Figure 2.4 The Inflation Rate in the United States,

Inflation  Inflation- is A Overall Rising of Prices.

Deflation  Deflation- is an Overall Falling in the Level of Prices

Price Stability The Economy Has Reached Price Stability When The Overall Level of Prices Changes Slowly or Not At All. The Economy Has Reached Price Stability When The Overall Level of Prices Changes Slowly or Not At All.

Stagflation A Period of Falling Output and Rising Prices.

Open Economy An Economy is an Open Economy When it Actively Trades Goods and Services with Other Countries. An Economy is an Open Economy When it Actively Trades Goods and Services with Other Countries.

Trade Deficit A Country Runs a Trade Deficit When the Value of Goods and Services Bought From Foreigners is More Than the Goods and Services it Sells to Them. A Country Runs a Trade Deficit When the Value of Goods and Services Bought From Foreigners is More Than the Goods and Services it Sells to Them.

Trade Surplus An Economy Runs a Trade Surplus When The Value of Goods and Services Bought From Foreigners is Less Than The Value of Goods and Services it Sells to Them. An Economy Runs a Trade Surplus When The Value of Goods and Services Bought From Foreigners is Less Than The Value of Goods and Services it Sells to Them.