1.an Introduction to Macroeconomics

8/6/2019 1.an Introduction to Macroeconomics

1/38

Chapter 1

An Introduction to Macroeconomics

Where the telescope ends, the microscopebegins.

Which of the two has the grander view?

VICTOR HUGO


2/38

Macroeconomics & Microeconomics

Microeconomics

Decisions of individual units

No matter how large

Macroeconomics Behavior of entire economies

No matter how small

Economic aggregates

2


3/38


Aggregation

Combine many individual markets

Into one overall market

Composition of demand & supply In various markets

Important for microeconomics issues

Not important for macroeconomics issues During economic fluctuations

Markets move up or down together3


4/38


Macroeconomics

Assume most details

Resource allocation & income distribution

Relatively unimportant

Microeconomics

Ignore macroeconomics issues

Focus individual markets Allocate resources

Distribute income

4


5/38

Supply & Demand in Macroeconomics

Aggregate demand curve

Quantity of domestic product demanded

Each possible value of price level

Aggregate supply curve Quantity of domestic product supplied

Each possible value of price level

5


6/38

Two interpretations of a shift in the demand curve

Figure 1

6

0

Quantity

Price

(a)

D

D

0

Quantity

Price

(b)

Q0

S

S

P0

E

D0

D0S

S

P0

D1

D1

P1E

A


7/38


Inflation

Sustained increase in price level

Outward shift of aggregate demand curve

Recession period of time Total output declines

Production falls

People lose jobs Leftward shift of aggregate demand curve

7


8/38

An economy slipping into a recession

Figure 2

8

0

Domestic Product

PriceL

evel

D0

D0

Q0

S

S

P0

D2

D2

P2

Q2

E

B


9/38


Macroeconomists study

Inflation

Recession & unemployment

Economic growth

9


10/38

Economic growth

Figure 3

10

0

Domestic Product

PriceLe

vel

D0

D0

Q0

S0

S0

D1

D1

Q1

E

S1

S1

C


11/38

Gross Domestic Product

Gross domestic product (GDP)

Sum: money values

All final goods & services

Produced - domestic economy

Sold organized markets

Specified period of time

Usually a year

11


12/38


Nominal GDP

GDP in current dollars

Value outputs current prices

Real GDP Value outputs of different years

Common prices

12


13/38


GDP - particular year

Add up money value of things

Goods & services

Produced within the year

Final goods & services

Production: geographic boundaries of U.S.

Organized markets

13


14/38


Final goods and services

Purchased by their ultimate users

Intermediate good - purchased

For resale For use in producing another good

14


15/38


Limitations of GDP

Not measure: nations economic well-being

Includes only market activity

Places no value on leisure Counted: Bads and Goods

Ecological costs

Not deducted from GDP

15


16/38

The Economy on a Roller Coaster

U.S. economy

Growth with fluctuations

Macroeconomic fluctuations

Business cycles Real GDP per capita

Ratio: real GDP divided by population

16


17/38

Nominal GDP, real GDP, real GDP per capita since 1959

Figure 4

17


18/38

The growth rate of U.S. real GDP since 1870

Figure 5

18


19/38


Inflation

Sustained increase

General price level

Deflation Sustained decrease

General price level

19


20/38

The inflation rate in the United States since 1870

Figure 6

20


21/38


The Great Depression, 1929-1933

Decline in economic activity

Rapid deflation

Production declined 30%

Unemployment rate

Increased from 3% to 25%

21


22/38


The Great Depression, 1929-1933

Revolution in economic thought

Before: economy corrects itself

After: decrease in aggregate demand

Monetary & fiscal policy

Ended: early 1940s

22


23/38


From WWII to 1973

Increased government spending

Increased aggregate demand

Accidental fiscal policy

Price controls

Shortage: consumer goods

1960s strong growth

Vietnam war increased spending

Inflation & high unemployment

Wage & price controls23


24/38


Fiscal policy

Government spending & taxation

Used to steer aggregate demand

Stagflation Inflation

While economy

Growing slowly (stagnating) Or recession

24


25/38


The Great Stagflation, 1973-1980

OPEC 1973 oil prices quadrupled

Poor harvests

Recession Inflation rate: 12%

High unemployment

Stagflation

Inward shift of aggregate supply

25


26/38


The Great Stagflation, 1973-1980

Economy recovered

Government actions

Natural economic forces

1979 OPEC soaring oil prices

Stagflation

Inflation: 16%

26

Fi 7


27/38

The effects of an adverse supply shift

Figure 7

27

0

Real GDP

PriceL

evel

D

D

S0

S0

E

S1

S1

A


28/38


Reaganomics and its aftermath

Recovery underway

High inflation

Federal Reserve

Monetary policy

High interest rate

Monetary policy

Actions Federal Reserve

Change interest rates

Influence aggregate demand28


29/38


Reaganomics and its aftermath

1981-1982 recession

Large budget deficits

Recovery started 1982-1983

President Bush

Inflation

Deficit-reduction package

Spike in oil prices

1990-1991 recession

29


30/38


Clintonomics: deficit reduction

Deficit-reduction package, 1993 & 1997

Tax increase & spending cuts

Large surplus

Economy boomed

Lower inflation

Aggregate supply curves Pushed outward rapid pace, 1996 1998

30

Fig re 8


31/38

The effects of a favorable supply shift

Figure 8

31

0

Real GDP

Price

Le v

el

D0

D0S0

S0

D1

D1

E

S1

S1

C

S2

S2

B

Th E R ll C


32/38


Tax cuts and the Bush economy

2001 recession

First in 10 years

Tax cut 2001

Budget deficit

Burst of government spending

War on terror

Aggregate demand shift outward

Federal Reserve

Lowered interest rate32

P bl f M i St bili ti


33/38

Problem of Macroeconomic Stabilization

Stabilization policy

Government programs

Prevent or shorten recessions

Counteract inflation, stabilize prices

33



34/38


Fight unemployment

Increase aggregate demand

Government - Fiscal policy

Increase spending

Cut taxes Federal Reserve - Monetary policy

Lower interest rates

Increase output

Reduce unemployment

Raise prices

34

Figure 9


35/38

Stabilization policy to fight unemployment

Figure 9

35

0

Real GDP

PriceL

evel

D0

D0 S0

S0

D1

D1

E

A

Increase in output



36/38


Fight inflation

Decrease aggregate demand

Government - Fiscal policy

Cut spending

Increase taxes

Federal Reserve - Monetary policy

Increase interest rates

Decrease inflation (decrease prices) Decrease output

Increase unemployment

36

Figure 10


37/38

Stabilization policy to fight inflation

Figure 10

37

0

Real GDP

Price

Le

vel

D0

D0 S

S D2

D2

E

B

Decrease

in prices


38/38

Stabilization policy

Prewar data

Fluctuations unmanaged economy

Booms & recessions

Natural economic reasons

Little government intervention Postwar data

Economy - managed by government policy

Successfully or unsuccessfully

Recessions - less severe

More inflation-prone

38

Documents

1.an Introduction to Macroeconomics