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Introduction to Macroeconomics Chapter 19. Contemporary Macroeconomics.

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Presentation on theme: "Introduction to Macroeconomics Chapter 19. Contemporary Macroeconomics."— Presentation transcript:

1 Introduction to Macroeconomics Chapter 19. Contemporary Macroeconomics

2 Contemporary Macroeconomics 1. Employment - Unemployment 2. Business Cycle 3. Aggregate Supply/Demand Curves 4. Discretionary Government Policy

3 1. Employment - Unemployment Measurement Types of Unemployment Natural Rate of Unemployment Okun’s Law

4 Unemployment Rates U.S. Fairfax Co., VA. 1973 - 1975 recession 1981 - 1982 recession 1990 - 1991 recession Great Depression (1929 - 1933) World War II (1941 - 1945)

5 Measurement Employed persons + Unemployed persons Total labor force + Not in labor force Civilian noninstitutional population (16 and over) Unempoyment Rate (percent) = Unemployed * 100 Total Labor Force

6 U.S. Labor Force Participation Rate Men Women

7 Types of Unemployment Frictional Unemployment - dynamic labor force in a stable economy (voluntary unemployment) Structural Unemployment - stable labor force in a dynamic economy (involuntary unemployment but probably unavoidable) Cyclical Unemployment - unstable economy (involuntary unemployment and possibly avoidable through gov’t policy)

8 “Natural Rate” of Unemployment Natural Rate of Unemployment - consistent with frictional and structural unemployment. Full Employment Output - total output of economy when unemployment is at the natural rate. During the business cycle total output fluctuates around the full employment level.

9 Okun’s Law Output fluctuates more than unemployment over the business cycle 1 % decline in output leads to 1/2% of workers becoming unemployed

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11 Business Cycles Recurrent, systematic fluctuations in the level of business activity: - real GDP growth rate - inflation - unemployment

12 Real GDP Unemployment Rate (percent) Inflation Rate (percent) PeakTroughPeak ContractionExpansion (Recession)

13 Quarterly Changes in Real GDP

14 Index of Leading Economic Indicators Sources: The Conference Board: www.tcb-indicators.org/ NBER: www.nber.org PTPTPTPTPTPT

15 2. Aggregate Supply and Demand Aggregate Demand - total spending in an economy at various “average” price levels Aggregate Supply - total production in an economy at various “avereage” price levels Equilibrium - aggregate demand equals aggregate supply

16 3. Discretionary Government Policy Fiscal Policy and Monetary Policy Demand-side and Supply-side Policy

17 Fiscal and Monetary Policy Fiscal Policy - U.S. Congress –Government spending –Taxes Monetary Policy - Federal Reserve –Discount (interest) rate –Money supply (T-Bill sales/purchases) –Required bank reserves –Stock market margin requirements

18 Supply-Side and Demand-Side Demand-Side Policy - intended to alter the overall level of spending (aggregate demand) Supply-Side Policy - intended to alter incentives to produce output (aggregate supply)


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