© 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of 9e Case, by Fair and Oster CHAPTER 20 Introduction to PARTIV CONCEPTS ANDPROBLEMS IN MACROECONOMICSIN Macroeconomics Introduction to Introduction The U.S. Economy Since Economy1970 Since U.S. The A Brief Macroeconomics Historyof The Role the of Government in the The Three Market Arenas The Circular Flow Diagram the Macroeconomy of ComponentsThe Inflation and Deflation Unemployment Output Growth Macroeconomic Concerns CHAPTEROUTLINE Macroeconomy 20 1 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Introduction Introduction to Macroeconomics suppliedandquantity demanded. rapidlyto maintainbetweenequalityquantity stickyprices householdsandfirms together. aggregate behavior insteadof individual prices. investment,andlooksat level theof overallprices aggregatessuch asaggregateconsumptionand determinantsoftotal national income, deals with whole. Macroeconomicsfocuses on the macroeconomics decision individualindustriesandthe behavior ofindividual - making units making Pricesdo that notalways adjust Examinesthe functioningof Dealswiththe economyasa — The The behaviorof all firms and households.firms and 2 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. Whichthe of followingstatements iscorrect? Allthe of above. explainwhymost marketsarriveequilibrium. at lookMicroeconomists formacroeconomicfoundationsto withthe decisionsofhouseholds andfirms. Both macroeconomicsandmicroeconomicsare concerned industries. Macroeconomicsexaminestheof individual behavior 3 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. Whichthe of followingstatements iscorrect? Allthe of above. explainwhymost marketsarriveequilibrium. at lookMicroeconomists formacroeconomicfoundationsto concernedwith the decisions ofhouseholds and firms. Both macroeconomicsmicroeconomicsand are industries. Macroeconomicsexaminestheof individual behavior 4 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Macroeconomic Concerns are Three of theconcernsof majormacroeconomics Inflationand deflation Unemployment Outputgrowth 5 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. For economists,themeasureof how maineconomyis doingan is: The The growthrate of the population. The aggregateprice level. Aggregateemployment. Aggregateoutput. 6 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. For economists,themeasureof how maineconomyis doingan is: The The growthrate of the population. The aggregateprice level. Aggregateemployment. Aggregateoutput. 7 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Macroeconomic Concerns OutputGrowth depression quarters. aggregateoutputdeclinesfor twoconsecutive output declines. Conventionally, a periodwhichin recession period. producedservicesan in economyin agiven aggregate output downsin the economy. business cycle A periodduringwhich aggregate A prolongedanddeeprecession. The The cycleofshort The The totalof goodsand quantity - term ups and 8 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Macroeconomic Concerns OutputGrowth duringwhichandoutputfall. employment the businesscyclefrom a peakdownto a trough contraction, recession, outputandemployment grow. cyclefrom atroughup a to peakwhich during expansion or boom boom The The periodin the business or slump The The periodin 9 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Macroeconomic Concerns Business Business Cycle  in recession. recession. in point through a trough, to downpeak a from moves economythe When peak. to the trough point through moves it as is expanding economy thecycle, businessthis In OutputGrowth FIGURE 20.1 20.1 FIGURE B , the economy is economy, the ATypical A from the from 10 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Macroeconomic Concerns  aggregate output. aggregate in World fluctuationsandWars largest the DepressionII show I andGreat the of periods The OutputGrowth FIGURE 20.2 FIGURE20.2 U.S. Aggregate(Real 1900 OutputGDP), – 2007 11 of 36 of © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics Macroeconomic Concerns Inflationand Deflation Unemployment deflation deflation the overalllevel.price hyperinflation inflation forceis unemployed. that unemploymentrate An increaseinprice the level. overall A decreaseinprice the level. overall A periodof veryrapid increasesin The The percentageofthe labor 12 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. In microeconomictheory, whichof the followinghappensas the samethe end. in Supplyanddemand willshift, butremain pricethe equilibrium The marketwillturn ashortageinto asurplus. thesupplied. quantity increasethe in quantity oflabordemandedanda decrease in As ittowardmovesthe equilibrium, marketexperiences an whenthereunemployment. was The wageequilibriumrises abovethe wagethatprevailed equilibrium? labormarketeliminatesunemployment and its restores 13 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. In microeconomictheory, whichof the followinghappensas the samethe end. in Supplyanddemand willshift, butremain pricethe equilibrium The marketwillturn ashortageinto asurplus. decreasein the quantity supplied. an increasein the quantity labor demanded of and a Asmovesit equilibrium, toward the marketexperiences whenthereunemployment. was The wageequilibriumrises abovethe wagethatprevailed equilibrium? labormarketeliminatesunemployment and its restores 14 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy (4) (3) (2) (1) participantsthein economyinto four broadgroups: thepicture, bigit ishelpful todividethe Macroeconomicsfocusesfour on groups. To see the the firms households rest ofthe world government , , , and , . 15 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy The The DiagramCircularFlow benefits,welfare andpayments. TheyincludeSocialSecuritybenefits, veterans’ services,exchange orlaborinfor these payments. governmentto peoplewhonotsupplydogoods, transferpayments the economy. receivedandpaymentsmade byeachsector of circular flow A diagramshowingthe income Cash payments made bythe paymentsCash 16 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy Flow Paymentsof Flow  firms and and firms the government, purchase Households receive income from also also purchase imports. diagram, firms and governments Note: (exports). servicesproduced domestically countries purchase goods and households. Finally, people in other interest and transfers to government workers services households goodsfor and households, pays and firms receives and taxesfirms from government. The government households and taxes to the dividends, interest, and rents to services; they pay wages, and the government for goods and receive payments households from and services Firms (imports). also purchase foreign pay taxes the to government. They goods and servicesand firms, from The The DiagramCircularFlow FIGURE 20.3 20.3 FIGURE Although not shown in this — including wages to The Circular Circular The — - made goods and and pays 17 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy The The MarketThree Arenas (3) (2) (1) We dividethe markets three into broadarenas: whichtheyinteract. to relateeachother istoconsider the marketsin firms, the government,andtheof rest the world Anotherwayof looking atthe ways households, the(financial)market. money the labormarket, and the goods - and - services market, services 18 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy LaborMarket Goods The MarketThree Arenas - and andthe government In this market, households from this market. Households,the government,andfirms Firms - Services Market Services supply to the goods demand - and supply labor. - services market. services laborand firms demand 19 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy MoneyMarket The MarketThree Arenas coordinatedbyfinancialinstitutions. alsoengageborrowing andin lending which is Firms, the government,andtheof rest the world dividendson andinterest stocks on bonds. expectationincomeof earningin of the form Households supply funds to fundsthe thismarket in 20 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy MoneyMarket The MarketThree Arenas firm paysouteachperiod to its shareholders. dividends thereforethe right tosharethe infirm’s profits. the holdera sharein the firm’s ownershipand sharesof stock theyfirms whenborrowmoney. corporate bonds borrowsmoney. notes issuedbythe federalwhengovernmentit Treasury bonds, notes, The The portionof afirm’s profitsthatthe Financialinstrumentsthat giveto Promissorynotesissued by and bills bills Promissory 21 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics e. d. c. b. a. Allthe of followingareinstruments, debtnotes orpromissory Corporatebonds. CorporateStocks. Treasurybills. Treasurynotes. Treasurybonds. issuedbya borrower, exceptone.Which one? 22 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics e. d. c. b. a. Allthe of followingareinstruments, debtnotes orpromissory Corporatebonds. Corporate Stocks. Treasurybills. Treasurynotes. Treasurybonds. issuedbya borrower, exceptone.Which one? 23 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The Components of the Macroeconomy The The Roleof the Governmentthe Macroeconomy in turn affects interest rates. Reserveto control theof money, quantity whichin monetarypolicy taxesandspending. fiscalpolicy Governmentpolicies concerning The usedThe tools by the Federal 24 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics A Brief History of Macroeconomics highunemployment. stagflation andunemployment. refer the to government’sroleregulating ininflation fine 1930s. began1929andin continued throughout the economiccontractionandhighunemployment that Great Depression - tuning tuning A situationof both highinflation and The The phraseusedbyWalter to Heller The The periodof severe 25 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. Whichthe of followingideaswascentralin theory? Keynesian a depression. Monetarypolicycan bringthe economyout ofarecession,or outputandemploymentthe ineconomy. Governmentinterventionbe canto used affectthe of level outputand employment thein economy. Self thata market willto deviations quickly adjust fromequilibrium. The invisiblehand. The forces of supplyanddemand ensure - correctingandwagespricesdetermine the of level 26 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. Whichthe of followingideaswascentralin theory? Keynesian a depression. Monetarypolicycan bringthe economyout ofarecession,or and employmentof output in the economy. Governmentinterventioncanbe used toaffect level the outputand employment thein economy. Self thata market willto deviations quickly adjust fromequilibrium. The invisiblehand. The forces of supplyanddemand ensure - correctingandwagespricesdetermine the of level 27 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics A Brief History of Macroeconomics Literature in Macroeconomics equations. and graphs well as as novels stuffof the are studyeconomists underlyingThe phenomena that The Grapes of Wrath of Grapes The The Great Gatsby Great The 28 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The U.S Economy Since 1970  recessionary periods: 1974 I 1974 periods: recessionary four been have there but overall, risen has 1970 since States United in the output Aggregate FIGURE 20.4 20.4 FIGURE Aggregate Output (Real GDP), 1970 (Real 1970 GDP), AggregateI Output – 1975 IV,1975 II 1980 – 1983 I, 1990 III 1990 I, 1983 – 2007 2007 IV – 1991 I, and 2001 I 2001 I, and 1991 – 2001 III. 2001 29 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The U.S Economy Since 1970  periods show increases in the unemployment rate. unemployment in the increases show periods reference recessionary four The variations. wideshows 1970 since rate U.S. unemployment The FIGURE 20.5 20.5 FIGURE Unemployment Rate, 1970 Unemployment Rate, 1970 I – 2007 2007 IV 30 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The U.S Economy Since 1970 1970 1970 I  between 1983 and 1992 was moderate. Since 1992, it has been fairly low.fairly been it has 1992, Since moderate. was 1992 and 1983 between IV 1973 periods: in two high been has inflation 1970, Since FIGURE 20.6 20.6 FIGURE – 2007 2007 IV Inflation Rate Rate Change (Percentage the GDP Inflation in Deflator, Four – 1975 IV and 1979 I 1979 and IV 1975 - Quarter Quarter Average), – 1981 IV.1981 Inflation 31 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. Since1983, whichof the followingrates hasrelative beenlowto The The exchangerate. The rateinterest. of The inflationrate. The unemploymentrate. the standardsof the 1970s? 32 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics d. c. b. a. Since1983, whichof the followingrates hasrelative beenlowto The The exchangerate. The rateinterest. of The inflation rate. The unemploymentrate. the standardsof the 1970s? 33 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics The U.S Economy Since 1970 JohnMaynard Keynes Money and Interest Employment, of whose Keynes, MaynardJohn of works the from comes macroeconomics modern of framework of the Much was published in published 1936. was General Theory General 34 of 36 © 2009 2009 © Pearson Education, Publishing Inc. as Prentice Hall Principles of Economics 9e Case, by Fair and Oster CHAPTER 20 Introduction to Macroeconomics GreatDepression fine expansion dividends depression deflation corporatebonds contraction,recession, circularflow businesscycle aggregateoutput aggregatebehavior - tuning REVIEW TERMS AND CONCEPTS or boom or slump unemploymentrate Treasurybonds,notes, transfer payments pricessticky stagflation sharesof stock recession monetarypolicy microeconomics macroeconomics inflation hyperinflation bills and 35 of 36