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Chapter 22 an introduction to macroeconomics
The document discusses macroeconomics and provides an overview of the US economy since the Great Depression. It summarizes that macroeconomists study inflation, recession, unemployment, and economic growth at an aggregate level. It then reviews key events in the US economy such as the Great Depression, stagflation in the 1970s, recessions in the 1980s and 1990s, the economic boom of the 1990s, and the Great Recession beginning in 2008. The document uses graphs and diagrams to illustrate macroeconomic concepts like GDP, inflation, recessions, and shifts in aggregate supply and demand.
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Chapter 22 an introduction to macroeconomics
- 1. PowerPoint Slides preparedby: 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 2© 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.
- 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 3© 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.
- 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 4© 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.
- 5. Macroeconomics • Aggregate demandcurve –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 5© 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.
- 6. Figure 1 Two interpretationsof 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 increasein 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 7© 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.
- 8. Figure 2 An EconomySlipping 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 –Recessionand unemployment –Economic growth 9© 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.
- 10. Figure 3 Economic Growth 10 0 DomesticProduct 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 11© 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.
- 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 12© 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.
- 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 13© 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.
- 14. Gross Domestic Product •Final goods and services –Purchased by their ultimate users • Intermediate good - purchased –For resale –For use in producing another good 14© 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.
- 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 15© 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.
- 16. The Economy ona Roller Coaster • U.S. economy –Growth – with fluctuations • Macroeconomic fluctuations –Business cycles • Real GDP per capita –Ratio of real GDP divided by population 16© 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.
- 17. Figure 4 Nominal GDP,Real GDP, and Real GDP per Capita since 1959 17© 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.
- 18. Figure 5 The GrowthRate of U.S. Real Gross Domestic Product since 1870 18© 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.
- 19. The Economy ona Roller Coaster • Inflation –Sustained increase in the general price level • Deflation –Sustained decrease in the general price level 19© 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.
- 20. Figure 6 The InflationRate in the United States since 1870 20© 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.
- 21. The Economy ona 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 21© 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.
- 22. The Economy ona 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 22© 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.
- 23. The Economy ona 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 23© 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.
- 24. The Economy ona Roller Coaster • Fiscal policy –Government spending and taxation –Used to steer aggregate demand • Stagflation –Inflation –While economy • Growing slowly (“stagnating”) • Or recession 24© 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.
- 25. The Economy ona 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 25© 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.
- 26. The Economy ona 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 as 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 Effectsof 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 ona 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 28© 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.
- 29. The Economy ona 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 29© 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.
- 30. The Economy ona 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 30© 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.
- 31. Figure 8 The Effectsof 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 ona 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 32© 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.
- 33. The Economy ona 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 33© 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.
- 34. The Economy ona 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 34© 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.
- 35. Macroeconomic Stabilization • Stabilizationpolicy –Government programs designed to prevent or shorten recessions –And to counteract inflation • To stabilize prices 35© 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.
- 36. Macroeconomic Stabilization • Combatingunemployment –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 36© 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.
- 37. Figure 9 Stabilization Policyto 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 • Combatinginflation –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 38© 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.
- 39. Figure 10 Stabilization Policyto 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 • Prewardata –Fluctuations – unmanaged economy • Booms & recessions – “Natural” economic reasons • Little government intervention 40© 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.
- 41. Stabilization policy • Postwardata –Economy - managed by government policy • Successfully or unsuccessfully –Recessions - less severe –More inflation-prone 41© 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.