1.an introduction to macroeconomics
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Chapter 1
An Introduction to Macroeconomics
Where the telescope ends, the microscopebegins.
Which of the two has the grander view?
VICTOR HUGO
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Macroeconomics & Microeconomics
Microeconomics
Decisions of individual units
No matter how large
Macroeconomics Behavior of entire economies
No matter how small
Economic aggregates
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Macroeconomics & Microeconomics
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
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Macroeconomics & Microeconomics
Macroeconomics
Assume most details
Resource allocation & income distribution
Relatively unimportant
Microeconomics
Ignore macroeconomics issues
Focus individual markets Allocate resources
Distribute income
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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
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Two interpretations of a shift in the demand curve
Figure 1
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0
Quantity
Price
(a)
D
D
0
Quantity
Price
(b)
Q0
S
S
P0
E
D0
D0S
S
P0
D1
D1
P1E
A
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Supply & Demand in Macroeconomics
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
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An economy slipping into a recession
Figure 2
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0
Domestic Product
PriceL
evel
D0
D0
Q0
S
S
P0
D2
D2
P2
Q2
E
B
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Supply & Demand in Macroeconomics
Macroeconomists study
Inflation
Recession & unemployment
Economic growth
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Economic growth
Figure 3
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0
Domestic Product
PriceLe
vel
D0
D0
Q0
S0
S0
D1
D1
Q1
E
S1
S1
C
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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
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Gross Domestic Product
Nominal GDP
GDP in current dollars
Value outputs current prices
Real GDP Value outputs of different years
Common prices
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Gross Domestic Product
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
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Gross Domestic Product
Final goods and services
Purchased by their ultimate users
Intermediate good - purchased
For resale For use in producing another good
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Gross Domestic Product
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
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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
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Nominal GDP, real GDP, real GDP per capita since 1959
Figure 4
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The growth rate of U.S. real GDP since 1870
Figure 5
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The Economy on a Roller Coaster
Inflation
Sustained increase
General price level
Deflation Sustained decrease
General price level
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The inflation rate in the United States since 1870
Figure 6
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The Economy on a Roller Coaster
The Great Depression, 1929-1933
Decline in economic activity
Rapid deflation
Production declined 30%
Unemployment rate
Increased from 3% to 25%
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The Economy on a Roller Coaster
The Great Depression, 1929-1933
Revolution in economic thought
Before: economy corrects itself
After: decrease in aggregate demand
Monetary & fiscal policy
Ended: early 1940s
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The Economy on a Roller Coaster
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
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The Economy on a Roller Coaster
Fiscal policy
Government spending & taxation
Used to steer aggregate demand
Stagflation Inflation
While economy
Growing slowly (stagnating) Or recession
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The Economy on a Roller Coaster
The Great Stagflation, 1973-1980
OPEC 1973 oil prices quadrupled
Poor harvests
Recession Inflation rate: 12%
High unemployment
Stagflation
Inward shift of aggregate supply
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The Economy on a Roller Coaster
The Great Stagflation, 1973-1980
Economy recovered
Government actions
Natural economic forces
1979 OPEC soaring oil prices
Stagflation
Inflation: 16%
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Fi 7
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The effects of an adverse supply shift
Figure 7
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0
Real GDP
PriceL
evel
D
D
S0
S0
E
S1
S1
A
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The Economy on a Roller Coaster
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
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The Economy on a Roller Coaster
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
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The Economy on a Roller Coaster
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
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Fig re 8
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The effects of a favorable supply shift
Figure 8
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0
Real GDP
Price
Le v
el
D0
D0S0
S0
D1
D1
E
S1
S1
C
S2
S2
B
Th E R ll C
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The Economy on a Roller Coaster
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
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Problem of Macroeconomic Stabilization
Stabilization policy
Government programs
Prevent or shorten recessions
Counteract inflation, stabilize prices
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P bl f M i St bili ti
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Problem of Macroeconomic Stabilization
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
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Figure 9
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Stabilization policy to fight unemployment
Figure 9
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0
Real GDP
PriceL
evel
D0
D0 S0
S0
D1
D1
E
A
Increase in output
P bl f M i St bili ti
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Problem of Macroeconomic Stabilization
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
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Figure 10
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Stabilization policy to fight inflation
Figure 10
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0
Real GDP
Price
Le
vel
D0
D0 S
S D2
D2
E
B
Decrease
in prices
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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
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