Chapter 22 an introduction to macroeconomics

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Chapter 22 an introduction to macroeconomics

  1. 1. PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University1© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.An Introduction toMacroeconomicsWhere the telescope ends, the microscope begins.Which of the two has the grander view?VICTOR HUGO
  2. 2. Drawing a Line• Drawing a line between macroeconomicsand microeconomics• Microeconomics–Decisions of individual units• No matter how large• Macroeconomics–Behavior of entire economies• No matter how small–Economic aggregates2© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  3. 3. Drawing a Line• Aggregation–Combine many individual markets intoone 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 together3© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  4. 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 income4© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  5. 5. Macroeconomics• Aggregate demand curve–Quantity of domestic product that isdemanded at each possible value of theprice level• Aggregate supply curve–Quantity of domestic product that issupplied at each possible value of theprice level5© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  6. 6. Figure 1Two interpretations of a shift in the demand curve60QuantityPrice(a)DD0QuantityPrice(b)Q0SSP0ED0D0SSP0D1D1P1EA© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  7. 7. Macroeconomics• Inflation–Sustained increase in the general pricelevel• Recession–A period of time during which the totaloutput of the economy declines• Production falls• People lose jobs–Leftward shift of aggregate demand curve7© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  8. 8. Figure 2An Economy Slipping into a Recession80Domestic ProductPriceLevelD0D0Q0SSP0D2D2P2Q2EB© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  9. 9. Macroeconomics• Macroeconomists study–Inflation–Recession and unemployment–Economic growth9© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  10. 10. Figure 3Economic Growth100Domestic ProductPriceLevelD0D0Q0S0S0D1D1Q1ES1S1C© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  11. 11. Gross Domestic Product• Gross domestic product (GDP)–Sum of the money values of all finalgoods and services–Produced in the domestic economy andsold on organized markets–During a specified period of time, usuallya year11© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  12. 12. Gross Domestic Product• Nominal GDP–GDP in current dollars–Calculated by valuing all outputs atcurrent prices• Real GDP–Calculated by valuing outputs of differentyears at common prices–Better measure than nominal GDP ofchanges in total production12© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  13. 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 markets13© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  14. 14. Gross Domestic Product• Final goods and services–Purchased by their ultimate users• Intermediate good - purchased–For resale–For use in producing another good14© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  15. 15. Gross Domestic Product• Limitations of GDP–Not a measure of the nation’s economicwell-being–Includes only market activity–Places no value on leisure–Counted: “Bads” and “Goods”–Ecological costs are not netted out of theGDP15© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  16. 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 population16© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  17. 17. Figure 4Nominal GDP, Real GDP, and Real GDP per Capita since195917© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  18. 18. Figure 5The Growth Rate of U.S. Real Gross Domestic Productsince 187018© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  19. 19. The Economy on a Roller Coaster• Inflation–Sustained increase in the general pricelevel• Deflation–Sustained decrease in the general pricelevel19© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  20. 20. Figure 6The Inflation Rate in the United States since 187020© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  21. 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 event21© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  22. 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 1940s22© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  23. 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 controls23© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  24. 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 recession24© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  25. 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 supply25© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  26. 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%26© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  27. 27. Figure 7The Effects of an Adverse Supply Shift270Real GDPPriceLevelDDS0S0ES1S1A© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  28. 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 demand28© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  29. 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 recession29© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  30. 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 – 199830© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  31. 31. Figure 8The Effects of a Favorable Supply Shift310Real GDPPriceLevelD0D0S0S0D1D1ES1S1CS2S2B© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  32. 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 rate32© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  33. 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 localgovernments33© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  34. 34. The Economy on a Roller Coaster• Obamanomics and the Great Recession–Bush, Obama administrations, the Fed• Variety of unprecedented emergencymeasures - to rescue the collapsing financialsystem–Summer 2009, the Great Recession wasover–Economy started growing again–High unemployment34© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  35. 35. Macroeconomic Stabilization• Stabilization policy–Government programs designed toprevent or shorten recessions–And to counteract inflation• To stabilize prices35© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  36. 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 prices36© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  37. 37. Figure 9Stabilization Policy to Fight Unemployment370Real GDPPriceLevelD0D0S0S0D1D1EAIncrease in output© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  38. 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 unemployment38© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  39. 39. Figure 10Stabilization Policy to Fight Inflation390Real GDPPriceLevelD0D0SSD2D2EDecreasein prices© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.B
  40. 40. Stabilization policy• Prewar data–Fluctuations – unmanaged economy• Booms & recessions– “Natural” economic reasons• Little government intervention40© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  41. 41. Stabilization policy• Postwar data–Economy - managed by governmentpolicy• Successfully or unsuccessfully–Recessions - less severe–More inflation-prone41© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use aspermitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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