Where You Are! Economics 201 – Principles of Macroeconomics Tuesday and Thursday from 2:00 to 3:15pm Discussion – Friday from 10:00am – 10:50am Text: Course website:

Who Am I Dr. John Neri Office Location: 1102B Morrill Hall Office Hours: T and Th: 3:30pm – 4:30pm

Illness or Family Emergency & Exams Important Steps to follow: Pre-Notification: If you are sick or have a family emergency and cannot take an exam, you must contact Professor Neri before the exam. You must fill out the Request for Excuse form. Written Verification: Illness or family emergency must be subsequently verified in writing by a physician, the Student Health Center If both steps are not followed, you will not be excused from the exam

Students using the DSS facility must meet with me within the first 2 weeks of classes.

Advice!!! Course is cumulative. Important to keep up with the lectures, and readings each week. We will have practice quizzes in the Friday discussion and review the answers. The collection of quizzes from the Friday discussion constitutes a practice exam. I do not post old exams.

microeconomics Examines the functioning of individual industries and the behavior of individual decision-making units—firms and households. macroeconomics Deals with the economy as a whole. Macroeconomics focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices. aggregate behavior The behavior of all households and firms together. sticky prices Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded. Introduction to Macroeconomics

Examples of Macroeconomic Questions What causes inflation? Why is the unemployment rate sometimes high and sometimes low? Why do some national economies grow faster than other national economies? What might cause interest rates to be low one year and high the next? How do changes in the money supply affect the economy? How do changes in government spending and tax policy affect the economy

A couple of questions for you: What/Who is ……. the current unemployment rate in the US? fiscal policy? the federal government budget deficit? the Federal Reserve System? the head of the Federal Reserve System? monetary policy?

Output growth -Economic growth how much we produce and can we keep it growing Unemployment High employment - Low unemployment Inflation and deflation Low stable inflation Three Major Macroeconomic Concerns

Economic Growth 1. Economic Growth – Defined as the increase in total production of goods and services in an economy that occurs over long periods of time Real Gross Domestic Product (real GDP) –Total quantity of goods and services produced in a country over a year – Also called “total output”

business cycle The cycle of short-term ups and downs in the economy. aggregate output The total quantity of goods and services produced in an economy in a given period. recession A period during which aggregate output declines. Conventionally, a period in which aggregate output declines for two consecutive quarters. depression A prolonged and deep recession. Output Growth expansion or boom The period in the business cycle from a trough up to a peak during which output and employment grow. contraction, recession, or slump The period in the business cycle from a peak down to a trough during which output and employment fall.

 FIGURE 5.1 A Typical Business Cycle In this business cycle, the economy is expanding as it moves through point A from the trough to the peak. The economy is in recession when it moves through point B from a peak down to a trough.

The Business Cycle peak trough +3% +4% -2% Long-run upward trend is 3%. In the expansion phase of the cycle, growth rate is > the trend. When output falls, we are in a recession.

 FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2009 The periods of the Great Depression and World War I and II show the largest fluctuations in aggregate output.

What causes Expansions and Recessions? What macroeconomic policies can be used to offset recessions or to sustain expansions? What has caused the recent/current recession - often referred to as the “Great Recession”? Questions - Economic Growth

Unemployment unemployment rate The percentage of the labor force that is unemployed. Inflation and Deflation inflation Percentage increase in the overall price level. hyperinflation A period of very rapid increases in the overall price level. deflation A decrease in the overall price level. dis-inflation a decrease in the rate of increase in the overall price level

Unemployment Rate : July 2015 In this last recession: Number of people unemployed increased from 7 million to 14 million July 2015: 5.3%

What causes unemployment to rise and fall? Can Monetary and Fiscal Policies be used to keep the unemployment rate low? What are the obstacles? Questions - Unemployment Rate

In most years, the inflation rate has been positive. During some periods (after World War II, and a few years in the 1970s and early 1980s), the U.S. experienced double-digit inflation. For the last two decades, however, the U.S. inflation rate has been very low. U.S. Annual Inflation Rate, 1920–2015

Understanding how the macroeconomy works can be challenging because a great deal is going on at one time. Everything seems to affect everything else. To see the big picture, it is helpful to divide the participants in the economy into four broad groups: (1) Households. (2) Firms. (3) The government. The Public Sector (4) The rest of the world. The Foreign Sector Households and firms make up the private sector, the government is the public sector, and the rest of the world is the foreign sector. The Components of the Macroeconomy The Private Sector

Simple Circular Flow The circular flow diagram shows the income received and payments made by each sector of the economy.

 FIGURE 5.3 The Circular Flow of Payments Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government. They also purchase foreign-made goods and services (imports). Firms receive payments from households and the government for goods and services; they pay wages, dividends, interest, and rents to households and taxes to the government. The government receives taxes from firms and households, pays firms and households for goods and services— including wages to government workers—and pays interest and transfers to households. Finally, people in other countries purchase goods and services produced domestically (exports). Note: Although not shown in this diagram, firms and governments also purchase imports.

Another way of looking at the ways households, firms, the government, and the rest of the world relate to one another is to consider the markets in which they interact. We divide the markets into three broad arenas: (1) The goods-and-services market. (2) The labor market. (3) The money (financial) market. The Three Market Arenas

Households and the government purchase goods and services from firms in the goods-and-services market. Firms purchase goods and services from each other and also supply to the goods-and-services market. Households, the government, and firms demand from this market. The rest of the world buys from and sells to the goods-and-services market. In the labor market, households supply labor and firms and the government demand labor. Labor is also supplied to and demanded from the rest of the world. Goods-and-Services Market Labor Market

Households supply funds to the money market—sometimes called the financial market—in the expectation of earning income in the form of dividends on stocks and interest on bonds. Households also demand (borrow) funds from this market to finance various purchases. Firms borrow to build new facilities in the hope of earning more in the future. The government borrows by issuing bonds. The rest of the world borrows from and lends to the money market. Much of this borrowing and lending is coordinated by financial institutions, which take deposits from one group and lend them to others. Money Market

Treasury bonds, notes, and bills Promissory notes issued by the federal government when it borrows money. corporate bonds Promissory notes issued by firms when they borrow money. shares of stock Financial instruments that give to the holder a share in the firm’s ownership and therefore the right to share in the firm’s profits. dividends The portion of a firm’s profits that the firm pays out each period to its shareholders.

A Little Macroeconomic History: 19th and early 20th century, Classical Theory/Classical Economist They focused on microeconomics They argued that market forces drive the economy toward full employment, possibly quickly – markets clear. In Macro Speak “The economy self-corrects” If unemployment exist, wages would adjust(fall) to move the economy back to full employment.

A Little Macroeconomic History: 1929 to 1933: The Great Depression Worldwide economic crisis. Total amount of goods and services produced in the U.S. fell by more than 25%. Unemployment up to 25%. A lot of unemployment for a long period of time.

A Little Macroeconomic History: 1936: John Maynard Keynes, “The General Theory of Employment, Interest, and Money” Replaces classical theory with theory based on: – Aggregate (Total) Demand – Wage and price rigidities – Markets don’t clear and it may take a long time for the economy to “self-correct” Birth of Macroeconomics as a field separate from microeconomics

A Little Macroeconomic History: Keynes believed government should intervene in the economy to stimulate the level of output and employment – During periods of low private demand, the government should take action to stimulate aggregate (total) demand to lift the economy to full employment. – Keynes was not a socialist. He was a capitalist. He simply felt capitalism could be unstable.

A Little Macroeconomic History: Private demand and Public demand? What can the government do to stimulate aggregate total demand (private and public) to lift the economy out of recession? Big, Big Question – does this stuff work? Almost 80 years later still debating this!

The U.S Economy Since 1970  FIGURE 5.4 Aggregate Output (Real GDP), 1970 I–2012 IV Aggregate output in the United States since 1970 has risen overall, but there have been five recessionary periods: 1974 I–1975 I, 1980 II–1982 IV, 1990 III–1991 I, 2001 I–2001 III, and 2008 I  2009 II.

 FIGURE 5.5 Unemployment Rate, 1970 I–2012 IV The U.S. unemployment rate since 1970 shows wide variations. The five recessionary reference periods show increases in the unemployment rate.

 FIGURE 5.6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average), 1970 I–2012 IV Since 1970, inflation has been high in two periods: 1973 IV–1975 IV and 1979 I–1981 IV. Inflation between 1983 and 1992 was moderate. Since 1992, it has been fairly low.

aggregate behavior aggregate output business cycle circular flow contraction, recession, or slump corporate bonds deflation depression dividends expansion or boom fine-tuning fiscal policy Great Depression hyperinflation inflation macroeconomics microeconomics monetary policy recession shares of stock stagflation sticky prices transfer payments Treasury bonds, notes, and bills unemployment rate R E V I E W T E R M S A N D C O N C E P T S