1. 06 An Introduction to Macroeconomics. McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Performance and Policy Real GDP Corrects for price changes Nominal GDP Uses current prices Unemployment Inflation Increase in overall level of prices LO1 6-2

3. Performance and Policy Can governments: Promote economic growth? Reduce severity of recession? Is monetary or fiscal policy more effective at mitigating recession? Is there a tradeoff between inflation and unemployment? Is anticipated or unanticipated government policy more effective? LO2 6-3

4. Performance and Policy Output growth 2.7% per year 1995-2007 Unemployment rate 4.6% in 2007 Inflation rate 2.7% in 2007 LO2 6-4

5. Modern Economic Growth Standard of living measured by output per person No growth in living standards prior to Industrial Revolution Modern economic growth Output per person rises Not experienced by all countries LO3 6-5

6. Global Perspective LO3 6-6

7. Savings and Investment Saving Trade-off current for future consumption Investment Financial investment Economic investment Banks and financial institutions LO4 6-7

8. Uncertainty, Expectations, and Shocks The future is uncertain Expectations affect investment Shocks What happens is not what you expected Demand shocks Supply shocks LO5 6-8

9. Uncertainty, Expectations and Shocks Demand shocks and flexible prices Price falls if demand is low Sales unchanged Demand shocks and sticky prices Maintain inventory Sales change Business cycles LO5 6-9

10. Demand Shocks Cars per week Price DMDM DLDL DHDH 900 $40,000 $37,000 $35,000 Flexible Prices LO5 6-10

11. Demand Shocks Cars per week DMDM DLDL DHDH 700 900 1150 $37,000 Fixed Prices Price LO5 6-11

12. Sticky Prices LO5 ItemMonths Coin-operated laundry machines46.4 Newspapers29.9 Haircuts25.5 Taxi fare19.7 Veterinary services14.9 Magazines11.2 Computer software5.5 Beer4.3 Microwaves ovens3.0 Milk2.4 Electricity1.8 Airline tickets1.0 Gasoline0.6 Source: Mark Bils and Peter J. Klenow, “Some Evidence on the Importance of Sticky Prices”, Journal of Political Economy, October 2004, pp 947-985, Used with permission of The University of Chicago Press. 6-12

13. Sticky Prices Many prices are sticky in the short run Consumers prefer stable prices Firms want to avoid price wars All prices are flexible in the long run Firms adjust to unexpected, but permanent changes in demand LO5 6-13

14. Inventory Management Computerized inventory tracking Unexpected changes in demand are easier to observe Firms make better output and employment decisions Less severe business cycles Before 2007, only two mild recessions since adoption Possible explanation LO5 6-14