WELCOME BACK TO USM !Big CONGRATS to those

who obtained A, A-, B+ & B

For those obtained B- and below….study smarter,

pleaseeeeeeee !McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education. All rights reserved.

MACROECONOMICS(ATW108)

Venue: DKVTute: TBA

Dr. Ema Izati bt Zull Kepili

McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education. All rights reserved.

24-3

AIM

MACRO A+

LO

24-4

On TUTE

• Different approach• Group presentation !!!• So, get a group of 4-5 (I choose or u choose?)• 2-3 groups will present the tute answers.• I will point out which group will present in

which week.

LO

Chapter 24

An Introduction to Macroeconomics

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24-6LO

24-7LO

24-8LO

24-9

By the end of this class/sem, you SHOULD be able to…

• LO1. Explain why economists focus on GDP, inflation, and unemployment when assessing the health of the entire economy.

• LO2. Discuss why sustained increases in living standards are a historically recent phenomenon.

• LO3. Identify why saving and investment are key factors in promoting rising living standards.

• LO4. Describe why economists believe that shocks and sticky prices are responsible for short-run fluctuations in output and employment

• LO5. Characterize the degree to which various prices in the economy are sticky.

LO

24-10

• Macro concerns with: long-run growth & short-run fluctuations (in output & employment)

• S/run = business cycle• Closely related because they happen

simultaneously.

LO

24-11

Performance and Policy• Business Cycle• Recession • (a period where output and living standards decline)

•What is the opposite of recession? • How to measure output? • How to measure performance? • How to evaluates how our economies are

operating?

LO1

24-12

GDP (Gross Domestic Product; KDN)

LO

measures the value of final goods and services produced within the borders of a country during a specific period of time, usually a year

Nominal GDP measures at their current prices & statistically eliminating the price changes that occurred over time.

Per person output

24-13

Unemployment

• High rates of unemployment are undesirable because they indicate that a large portion of the workforce is not producing

• 4% is considered ok.• Students = unemployed?

LO

24-14

Inflation

• High levels of inflation mean that it will cost the average family more to purchase the same goods and services.

• What is Malaysia’s inflation rate ? • Opposite of inflation? • Hyperinflation?

LO

24-15

As macroeconomists, you must answer these questions…

• Can governments:• Promote economic growth?• Reduce severity of recession?

• Is monetary or fiscal policy more effective at mitigating (reducing) recession?• Is there a tradeoff between inflation and

unemployment?• Is anticipated or unanticipated government

policy more effective?LO1

24-16LO

24-17

Performance and Policy

• Output growth• 2.7% per year 1995-2007

• U.S. unemployment rate• 9.1 in 2011• 17.9% in Greece, 3.5% in S. Korea, 9.3% in France, etc.

• U.S. inflation rate• 3% in 2011• 1.3% in Norway, 14% in Kenya, 21% in Argentina, etc.

LO1

24-18

Modern Economic Growth

• Refers to era post Industrial Revolution (using technology/machines to produce)

• It has increased the std of living of a person.• Prior to IR, country depends on traditional econ (agri)

with no advancement in machinery, therefore no growth in living standards

• Modern economic growth• Output per person rises• Not experienced by all countries• (Msia vs the Philippines vs Trinidad Tobago)

LO2

24-19

Global Perspective

LO2

24-20

Savings and Investment

• Conventional wisdom: To be successful in the future, you have to save today.

• Saving occurs when• Current consumption < current output• (Perbelanjaan mesti kurang dari hasil)• Trade-off current for future consumption

• Investment occurs when• resources are devoted to increasing future output• Financial investment & Economic investment

• H/hold = source of savings• Business = source of investors

LO3

24-21

What is the ultimate problem in managing economics?

LO

24-22

What is the ultimate problem in managing economics?

FUTURE(nobody knows what

future holds)LO

24-23

Uncertainty, Expectations, and Shocks

• Future = uncertain = decisions on savings & investment will also be uncertain.

• Shocks happen when unexpected situation occur, therefore affect investment.

• Eg: War, drastic climate change, earthquake.• Demand shocks - unexpected changes in the demand

for goods and services• Supply shocks - unexpected changes in the supply of

goods and services.

LO4

24-24

Uncertainty, Expectations, and Shocks

• If prices of good are flexible, the market price is adjustable to unexpected changes in demand.

• In s/run, production remains OK, sales OK, unemployment OK.

• BUT, prices RARELY flexible. It normally FIXED (sticky price).

• Thus, in order to ensure s/run economy does not fluctuate much, business must ‘play’ around with sales, technology, unemployment, or maintain inventory.

LO4

24-25

Demand Shocks

Cars per week

Pric

e

DMDL

DH

900

$40,000

$37,000

$35,000

Flexible Prices

LO4

24-26

Demand Shocks

Cars per week

DMDL

DH

700 900 1150

$37,000

Fixed Prices

Pric

e

LO4

24-27

Sticky Prices

LO5

Item MonthsCoin-operated laundry machines

46.4

Newspapers 29.9Haircuts 25.5Taxi fare 19.7Veterinary services 14.9Magazines 11.2Computer software 5.5Beer 4.3Microwaves ovens 3.0Milk 2.4Electricity 1.8Airline tickets 1.0Gasoline 0.6

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.

Flexi or sticky?

24-28

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

24-29

Debating the Great Recession

• The Minksy Explanation: Euphoric Bubbles• The Austrian Explanation: Excessively Low

Interest Rates• The Stimulus Solution• The Structural Solution