1. PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
1© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
An Introduction to
Macroeconomics
Where the telescope ends, the microscope begins.
Which of the two has the grander view?
VICTOR HUGO

2. Drawing a Line
• Drawing a line between macroeconomics
and 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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Drawing a Line
• Aggregation
–Combine many individual markets into
one overall market
• Composition of demand and supply
–In various markets
–Important for microeconomics issues
–Not important for macroeconomics issues
• During economic fluctuations
–Markets – move up or down together
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Drawing a Line
• Macroeconomics
–Assume most details
• Resource allocation and income distribution
• Relatively unimportant
• Microeconomics
–Ignore macroeconomics issues
–Focus on individual markets
• Allocate resources
• Distribute income
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Macroeconomics
• Aggregate demand curve
–Quantity of domestic product that is
demanded at each possible value of the
price level
• Aggregate supply curve
–Quantity of domestic product that is
supplied at each possible value of the
price level
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. Figure 1
Two interpretations of a shift in the demand curve
6
0
Quantity
Price
(a)
D
D
0
Quantity
Price
(b)
Q0
S
S
P0
E
D0
D0
S
S
P0
D1
D1
P1
E
A
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Macroeconomics
• Inflation
–Sustained increase in the general price
level
• Recession
–A period of time during which the total
output of the economy declines
• Production falls
• People lose jobs
–Leftward shift of aggregate demand curve
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Figure 2
An Economy Slipping into a Recession
8
0
Domestic Product
PriceLevel
D0
D0
Q0
S
S
P0
D2
D2
P2
Q2
E
B
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Macroeconomics
• Macroeconomists study
–Inflation
–Recession and unemployment
–Economic growth
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Figure 3
Economic Growth
10
0
Domestic Product
PriceLevel
D0
D0
Q0
S0
S0
D1
D1
Q1
E
S1
S1
C
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Gross Domestic Product
• Gross domestic product (GDP)
–Sum of the money values of all final
goods and services
–Produced in the domestic economy and
sold on organized markets
–During a specified period of time, usually
a year
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Gross Domestic Product
• Nominal GDP
–GDP in current dollars
–Calculated by valuing all outputs at
current prices
• Real GDP
–Calculated by valuing outputs of different
years at common prices
–Better measure than nominal GDP of
changes in total production
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13. Gross Domestic Product
• GDP - particular year
–Add up money value of things
–Goods and services
• Produced within the year
–Final goods and services
–Production: geographic boundaries of U.S.
–Organized markets
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. 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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15. Gross Domestic Product
• Limitations of GDP
–Not a measure of the nation’s economic
well-being
–Includes only market activity
–Places no value on leisure
–Counted: “Bads” and “Goods”
–Ecological costs are not netted out of the
GDP
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16. The Economy on a Roller Coaster
• U.S. economy
–Growth – with fluctuations
• Macroeconomic fluctuations
–Business cycles
• Real GDP per capita
–Ratio of real GDP divided by population
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Figure 4
Nominal GDP, Real GDP, and Real GDP per Capita since
1959
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Figure 5
The Growth Rate of U.S. Real Gross Domestic Product
since 1870
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. The Economy on a Roller Coaster
• Inflation
–Sustained increase in the general price
level
• Deflation
–Sustained decrease in the general price
level
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Figure 6
The Inflation Rate in the United States since 1870
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21. The Economy on a Roller Coaster
• The Great Depression, 1929-1933
–Decline in economic activity
–Rapid deflation
–Production declined 30%
–Business investment ceased
–Unemployment rate
• Increased from 3% to 25%
–World-wide event
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22. 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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23. 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 and high unemployment
–Wage and price controls
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24. The Economy on a Roller Coaster
• Fiscal policy
–Government spending and taxation
–Used to steer aggregate demand
• Stagflation
–Inflation
–While economy
• Growing slowly (“stagnating”)
• Or recession
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25. 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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26. 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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Figure 7
The Effects of an Adverse Supply Shift
27
0
Real GDP
PriceLevel
D
D
S0
S0
E
S1
S1
A
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. 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 demand
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. 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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. The Economy on a Roller Coaster
• Clintonomics: deficit reduction and the
“New Economy”
–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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Figure 8
The Effects of a Favorable Supply Shift
31
0
Real GDP
PriceLevel
D0
D0
S0
S0
D1
D1
E
S1
S1
C
S2
S2
B
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. The Economy on a Roller Coaster
• Tax cuts and the Bush economy
–2001 recession, the first in 10 years
–Tax cut 2001
–Budget deficit
–Burst of government spending
• War on terror
–Aggregate demand – shift outward
–Federal Reserve
• Lowered interest rate
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. The Economy on a Roller Coaster
• Obamanomics and the Great Recession
–January 2009, economy was sinking
• Jobs - disappearing at a rapid pace
–More tax cuts
–A burst of federal spending
–Large-scale aid to state and local
governments
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34. The Economy on a Roller Coaster
• Obamanomics and the Great Recession
–Bush, Obama administrations, the Fed
• Variety of unprecedented emergency
measures - to rescue the collapsing financial
system
–Summer 2009, the Great Recession was
over
–Economy started growing again
–High unemployment
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35. Macroeconomic Stabilization
• Stabilization policy
–Government programs designed to
prevent or shorten recessions
–And to counteract inflation
• To stabilize prices
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36. Macroeconomic Stabilization
• Combating unemployment
–Increase aggregate demand
• Government - Fiscal policy
– Increase spending and / or cut taxes
• Federal Reserve - Monetary policy
– Lower interest rates
–Increase output
–Reduce unemployment
–Raise prices
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37. Figure 9
Stabilization Policy to Fight Unemployment
37
0
Real GDP
PriceLevel
D0
D0
S0
S0
D1
D1
E
A
Increase in output
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

38. Macroeconomic Stabilization
• Combating inflation
–Decrease aggregate demand
• Government - Fiscal policy
– Cut spending and / or increase taxes
• Federal Reserve - Monetary policy
– Increase interest rates
–Decrease inflation (decrease prices)
–Decrease output
–Increase unemployment
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

39. Figure 10
Stabilization Policy to Fight Inflation
39
0
Real GDP
PriceLevel
D0
D0
S
S
D2
D2
E
Decrease
in prices
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
B

40. Stabilization policy
• Prewar data
–Fluctuations – unmanaged economy
• Booms & recessions
– “Natural” economic reasons
• Little government intervention
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41. Stabilization policy
• Postwar data
–Economy - managed by government
policy
• Successfully or unsuccessfully
–Recessions - less severe
–More inflation-prone
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