slides topic 1

8/10/2019 Slides Topic 1

http://slidepdf.com/reader/full/slides-topic-1 1/30

Topic

1

Introduction to

Macroeconomics

MACROECONOMICS



Content

Definition of

Macroeconomics

Three Big MacroeconomicsQuestions

Government Policy

Key Terms

2



Introduction to Macroeconomics

– The study of the performance of the national economy

and the global economy.

– Macroeconomics deals with the economy as a whole. Itstudies the behavior of economic aggregates such as

aggregate income, consumption, investment, and theoverall level of prices.

3

Definition of Macroeconomics




• Connections to microeconomics:

– Macroeconomic behavior is the sum of all the

microeconomic decisions made by individual

households and firms. We cannot understand theformer without some knowledge of the factors

that influence the latter.





– When we study macroeconomics we are looking at topicssuch as:

• Economic growth

• National Income

• Unemployment

• Inflation

• International trade

•Interest rate

5




The Roots of Macroeconomics

• The Great Depression was a period

of severe economic contraction and

high unemployment that began in

1929 and continued throughout the

1930s.




The Roots of Macroeconomics

• Classical economists applied microeconomic models,

or “market clearing” models, to economy-wide

problems.

•

The failure of simple classical models to explain theprolonged existence of high unemployment during

the Great Depression provided the impetus for the

development of macroeconomics.




Macroeconomic Concerns

• Three of the major concerns of

macroeconomics are:

– Inflation

– Output growth

– Unemployment




Inflation

• Inflation is an increase in the overall price

level.

• Hyperinflation is a period of very rapid

increases in the overall price level.

Hyperinflations are rare, but have been used

to study the costs and consequences of even

moderate inflation.




Output Growth

• The business cycle is the cycle of short-term

ups and downs in the economy.

• The main measure of how an economy is

doing is aggregate output:

– Aggregate output is the total quantity of goods

and services produced in an economy in a given

period.




Output Growth

• A recession is a period during which aggregate

output declines. Two consecutive quarters of

decrease in output signal a recession.

• A prolonged and deep recession becomes adepression.

• The size of the growth rate of output over a long

period is also a concern of macroeconomistsand policy makers.




Unemployment

• The unemployment rate is the percentage ofthe labor force that is unemployed.

• The unemployment rate is a key indicator of

the economy’s health. • The existence of unemployment seems to

imply that the aggregate labor market is not in

equilibrium. Why do labor markets not clearwhen other markets do?




Government in the Macroeconomy

Policy efforts undertaken to reduce the severity ofrecessions and inflation are called stabilizationpolicy.

One type of stabilization policy is monetary

policy The second type of stabilization policy is fiscal policy




Government in the Macroeconomy

• Fiscal policy refers to government

policies concerning taxes and

expenditures.

• Monetary policy consists of tools used

by the Federal Reserve to control the

money supply.




The Components of the

Macroeconomy

• The circular flow

diagram shows the

income received and

payments made by

each sector of the

economy.




The Components of the Macroeconomy

• Everyone’s

expenditures go

somewhere. Every

transaction must

have two sides.



The Three Market Arenas

• Households, firms, the government, and the rest of theworld all interact in the goods-and-services, labor, and

money markets.




• Households and the government purchase goods andservices (demand ) from firms in the goods-and

services market , and firms supply to the goods and

services market.

• In the labor market , firms and government purchase

(demand) labor from households (supply).

– The total supply of labor in the economy depends

on the sum of decisions made by households.





• In the money market —sometimes called the financialmarket —households purchase stocks and bonds from

firms.

• Households supply funds to this market in the

expectation of earning income, and also demand

(borrow) funds from this market.

• Firms, government, and the rest of the world also

engage in borrowing and lending, coordinated byfinancial institutions.




Business Cycle

• Economic fluctuations are irregular and

unpredictable.

– Fluctuations in the economy are often called the

business cycle.

• Most macroeconomic variables fluctuate

together.




Business Cycle

• Most macroeconomic variables fluctuate

together.

– Most macroeconomic variables that measure

some type of income or production fluctuate

closely together.

– Although many macroeconomic variables

fluctuate together, they fluctuate by differentamounts.




Business Cycle

Peak

Trough

Peak



Expansion

• During a period of expansion:

– Wages increase

– Low unemployment

– People are optimistic and spending money – High demand for goods

– Businesses start

–

Easy to get a bank loan – Businesses make profits and stock prices increase




Peak

• When the economic cycle peaks:

– The economy stops growing (reached the top)

– GDP reaches maximum

– Businesses can’t produce any more or hire more

people

– Cycle begins to contract




Contraction

• During a period of contraction:

– Businesses cut back production and layoff people

– Unemployment increases

– Number of jobs decline

– People are pessimistic (negative) and stop

spending money

– Banks stop lending money




Trough

• When the economic cycle reaches a trough:

– Economy “bottoms-out” (reaches lowest point)

– High unemployment and low spending

– Stock prices drop

But, when we hit bottom, no where to go but

up!UNLESS….




Who Cares?????

• Why should you care about the business cycle

and economy?

• Lots of reasons!




“Don’t quit that job!”

• If the economy is going into a contraction,

jobs will become more scarce. If you quit, you

may not find another job!

• But, if the economy is in a period of

expansion, jobs are readily available. It may be

a good time to switch careers.




“Should I make a big purchase?”

• Only if you know that you won’t lose your job

in a contraction. So, buy your house during anexpansion.

HOWEVER,• When the economy starts to slow down

(contraction), interest rates will decrease.

Wait to buy a house until the rates drop to alow point, if you are sure you won’t lose your job.




The End

30

slides topic 1

Documents