Chapter 1 Slide

1/29/2024
CHAPTER 1: GENERAL INTRODUCTION

OF MACROECONOMICS
Subjects and methods of macroeconomic research
Goals and tools of macroeconomics
Potential Output
Aggregate supply and aggregate demand
CHAPTER 1: GENERAL INTRODUCTION

OF MACROECONOMICS
The whole of science is nothing more than a

refinement of everyday thinking.
Albert Einstein
1
1/29/2024
UNIT OUTCOMES
 After going through this unit, students should be able to:

 Differentiate between microeconomics and macroeconomics.
 Understand the goals and tools of macroeconomics.
 Understand the concepts and factors that shift aggregate supply
and aggregate demand
MICROECONOMICS VS. MACROECONOMICS
What is microeconomics?
2
1/29/2024

individual actions and behaviors
 decisions of individuals and firms to

allocate resources of production,
exchange, and consumption
 prices and production in single markets
 the interaction between different markets
5

 the study of how households and

firms make decisions and how these
decision makers interact in the
marketplace.
Mankiw
3
1/29/2024

What is macroeconomics?
 Gross domestic
product.
 Interest rates.
 Inflation.
 Unemployment.
MICROECONOMICS VS. MACROECONOMICS:
the entire economy
 Delves into broad trends rather than

focusing on individual markets
 Reveals how major decisions could
play out not only in the immediate
future but also on a long-term basis
4
1/29/2024

 The study of the economy as a whole,

including growth in incomes, changes in
prices, and the rate of unemployment.
Mankiw

Could you differentiate between microeconomics and
macroeconomics?
Macro Refers to the big picture

Micro Focuses on smaller
(albeit just as
— wide-scale economic
important) concerns
concerns
The study of particular
The study of the whole
markets, and segments
economy
of the economy
Both fields are equally important and have a huge impact

on one another. 10
5
1/29/2024
11
SUBJECTS &METHODS OF MACROECONOMICS

 The object of study of macroeconomics is the whole economy and
its activities.
 Why have some countries experienced rapid growth in incomes
over the past century while others have stayed mired in poverty?
 Why do some countries have high rates of inflation while others
maintain stable prices?
 Why do all countries experience recessions and depressions —
recurrent periods of falling incomes and rising unemployment —
and how can government policy reduce the frequency and
severity of these episodes?
12
6
1/29/2024
SUBJECTS &METHODS OF MACROECONOMICS

-Focuses on the description,
quantification, and
explanation of economic
developments, expectations,
and associated phenomena
-Focuses on value-based
judgments aimed at
improving economic
development, investment
projects, and the distribution
of wealth
13
real GDP per person in the United States 14
7
1/29/2024
the U.S. inflation rate 15
The Unemployment Rate in the U.S. Economy 16
8
1/29/2024
QUESTIONS FOR REVIEW
1. Explain the difference between macroeconomics and

microeconomics. How are these two fields related?
2. List three macroeconomic issues that have been in the news
lately.
17
OBJECTIVES AND INSTRUMENTS OF MACROECONOMICS
Basic objectives of macroeconomics
• Three central questions of macroeconomics

• Why do output and employment sometimes fall, and how can
unemployment be reduced?
• What are the sources of price inflation, and how can it be kept
under control?
• How can a nation increase its rate of economic growth?
18
9
1/29/2024
high level and rapid growth

of output
Basic objectives of
macroeconomics
low unemployment, and
stable prices
19
20
10
1/29/2024
Production output grew at a high and

sustainable level
Create many jobs, reduce

Effective unemployment
Goals Growth
Stable Prices are stable, inflation is
Balance controlled at a moderate level
Stabilize the exchange rate and

balance the balance of payments
21
Government expenditures and

Fiscal Policy taxes
Money supply management =>
Monetary Policy interest rates => macro
variables...
Tools of
macro Income Policy Price - salary policy
economics
Export and import: tariffs, Quota,
Trade Policy technical measures
Foreign exchange Foreign currency supply and

Policy demand, exchange rates...
22
11
1/29/2024
QUICK QUIZZ
1. Recessions are periods of

a. rising incomes.
b. falling incomes.
c. rising prices.
d. falling prices.
2. The unemployment rate measures the fraction of
a. the adult population that has stopped looking for work.
b. the adult population that is not working.
c. the labor force that has stopped looking for work.
d. the labor force that is not working.
23
QUICK QUIZZ
3. Microeconomics is
a. the study of how macroeconomic data is constructed from
individual observations.
b. useful for understanding the decisions behind macroeconomic
relationships.
c. a separate field unrelated to macroeconomics.
d. a misspelling of the word macroeconomics.
24
12
1/29/2024
QUICK QUIZZ
4. What is the study of macroeconomics?
25
QUICK QUIZZ
5. _______ studies the behavior of individual economic units of an
economy
26
13
1/29/2024
QUICK QUIZZ
5. _______ studies the behavior of individual economic units of an
economy
27
KEY CONCEPTS
Recession: a period of declining real incomes and rising unemployment
Depression: a severe recession
28
14
1/29/2024
POTENTIAL OUTPUT
 Output: The ultimate objective of economic activity is to

provide the goods and services that the population desires.
 Potential output: the maximum amount of goods and services
an economy can turn out when it is most efficient-that is, at
full capacity
 Actual Output: the current level of production being realized
29
POTENTIAL OUTPUT
 Potential outputs - Yp: is the maximum sustainable output
that can be produced without triggering rising inflationary
pressures.
 Potential output is the absolute maximum output that an
economy can produce.
 In Yp, the economy still has unemployment, which is the
natural unemployment rate (Un).
 Potential output is also called full employment output.
30
15
1/29/2024
POTENTIAL OUTPUT
Actual and Potential GDP in the United States 31
POTENTIAL OUTPUT
 At the level of potential output there is still unemployment,
which is the natural rate of unemployment.
 Yp is the potential output
 YT is actual output
 Un is the natural unemployment rate
 Ut is the actual unemployment rate
 YT = Yp then Ut = Un
 YT > Yp then Ut < Un
 YT < Yp then Ut > Un
32
16
1/29/2024
POTENTIAL OUTPUT
33
AGGREGATE SUPPLY AND AGGREGATE DEMAND
What are economic fluctuations? What are their

characteristics?
How does the model of aggregate demand and aggregate
supply explain economic fluctuations?
Why does the Aggregate-Demand curve slope downward?
What shifts the AD curve?
What is the slope of the Aggregate-Supply curve in the short
run? In the long run?
What shifts the AS curve(s)?
34
17
1/29/2024

Introduction
• Over the long run, real GDP grows about 3% per year on
average.
• In the short run, GDP fluctuates around its trend.
• Recessions: periods of falling real incomes and rising
unemployment
• Depressions: severe recessions (very rare)
• Short-run economic fluctuations are often called business
cycles.
35
Three Facts About Economic Fluctuations

FACT 1: Economic fluctuations are
irregular and unpredictable.
14,000
12,000 U.S. real GDP,

10,000 billions of 2000 dollars
8,000
6,000 The shaded

bars are
4,000
recessions
2,000
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
36
18
1/29/2024

FACT 2: Most macroeconomic
quantities fluctuate together.
2,500
Investment spending,
2,000
billions of 2000 dollars
1,500
1,000
500
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
37

FACT 3: As output falls,
unemployment rises.
12
10 Unemployment rate,
percent of labor force
8
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
38
19
1/29/2024
• Explaining these fluctuations is difficult, and the theory of

economic fluctuations is controversial.
• Most economists use the model of aggregate demand and
aggregate supply to study fluctuations.
• This model differs from the classical economic theories
economists use to explain the long run.
39

 Aggregate supply refers to the total quantity
of goods and services that the nation’s
businesses willingly produce and sell in a given
period. Aggregate supply (often written AS )
depends upon the price level, the productive
capacity of the economy, and the level of costs.
 Aggregate demand refers to the total amount
that different sectors in the economy willingly
spend in a given period. Aggregate demand
(often written AD) equals total spending on
goods and services. It depends on the level of
prices, as well as on monetary policy, fiscal
policy, and other factors. 40
20
1/29/2024
The Model of Aggregate Demand and Aggregate Supply
P
The price
level
SRAS
“Short-Run
The model P1 Aggregate
determines the Supply”
eq’m price level “Aggregate
Demand” AD
and eq’m output Y

Y1
(real GDP).
Real GDP, the
quantity of output
41
The Aggregate-Demand (AD) Curve

P
The AD curve shows
the quantity of P2
all goods and
services demanded
in the economy at
any given price level. P1
AD
Y
Y2 Y1
42
21
1/29/2024
Why the AD Curve Slopes Downward
Y = C + I + G + NX P
Assume G fixed
by govt policy. P2
To understand
the slope of AD,
must determine P1
how a change in P AD
affects C, I, and NX.
Y
Y2 Y1
43
The Wealth Effect (P and C )

Suppose P rises.
• The dollars people hold buy fewer g&s,
so real wealth is lower.
• People feel poorer.
Result: C falls.
44
22
1/29/2024
The Interest-Rate Effect (P and I )

Suppose P rises.
• Buying g&s requires more dollars.
• To get these dollars, people sell bonds or other
assets.
• This drives up interest rates.
Result: I falls.
(Recall, I depends negatively on interest rates.)
45
The Exchange-Rate Effect (P and NX )

Suppose P rises.
• U.S. interest rates rise (the interest-rate effect).
• Foreign investors desire more U.S. bonds.
• Higher demand for $ in foreign exchange market.
• U.S. exchange rate appreciates.
• U.S. exports more expensive to people abroad,
imports cheaper to U.S. residents.
Result: NX falls.
46
23
1/29/2024
The Slope of the AD Curve: Summary

An increase in P P
reduces the quantity
of g&s demanded
because: P2
 the wealth effect

(C falls)
P1
 the interest-rate
AD
effect (I falls)
 the exchange-rate Y
Y2 Y1
effect (NX falls)
47
Why the AD Curve Might Shift

Any event that changes
C, I, G, or NX P
– except a change in P –
will shift the AD curve.
Example: P1
A stock market boom
makes households feel
wealthier, C rises, AD2
AD1
the AD curve shifts right.
Y
Y1 Y2
48
24
1/29/2024
• Changes in C
• Stock market boom/crash
• Preferences re: consumption/saving tradeoff
• Tax hikes/cuts
• Changes in I
• Firms buy new computers, equipment, factories
• Expectations, optimism/pessimism
• Interest rates, monetary policy
• Investment Tax Credit or other tax incentives
49
• Changes in G
• Federal spending, e.g., defense
• State & local spending, e.g., roads, schools
• Changes in NX
• Booms/recessions in countries that buy our exports.
• Appreciation/depreciation resulting from international
speculation in foreign exchange market
50
25
1/29/2024
ACTIVE LEARNING 1
The Aggregate-Demand curve
What happens to the AD curve in each of the following
scenarios?
A. A ten-year-old investment tax credit expires.
B. The U.S. exchange rate falls.
C. A fall in prices increases the real value of
consumers’ wealth.
51
ACTIVE LEARNING 1
Answers
A. A ten-year-old investment tax credit expires.
I falls, AD curve shifts left.
B. The U.S. exchange rate falls.
NX rises, AD curve shifts right.
C. A fall in prices increases the real value of consumers’
wealth.
Move down along AD curve (wealth-effect).
52
26
1/29/2024
The Aggregate-Supply (AS) Curves

The AS curve shows the P LRAS
total quantity of
g&s firms produce and SRAS
sell at any given price
level.
AS is:
 upward-sloping
in short run
 vertical in Y
long run
53
The Long-Run Aggregate-Supply Curve (LRAS)
The natural rate of P LRAS

output (YN) is the
amount of output
the economy produces
when unemployment
is at its natural rate.
YN is also called
potential output
Y
or YN
full-employment
output.
54
27
1/29/2024
Why LRAS Is Vertical

YN determined by the P LRAS
economy’s stocks of
labor, capital, and
natural resources, and
on the level of P2
technology.
An increase in P P1
does not affect

any of these,
Y
so it does not YN
affect YN.
(Classical dichotomy)
55
Why the LRAS Curve Might Shift

P LRAS1 LRAS2
Any event that
changes any of the
determinants of YN
will shift LRAS.
Example:
Immigration
increases L,
causing YN to rise. Y
YN Y’
N
56
28
1/29/2024
• Changes in L or natural rate of unemployment

• Immigration
• Baby-boomers retire
• Govt policies reduce natural u-rate
• Changes in K or H
• Investment in factories, equipment
• More people get college degrees
• Factories destroyed by a hurricane
57
• Changes in natural resources

• Discovery of new mineral deposits
• Reduction in supply of imported oil
• Changing weather patterns that affect agricultural production
• Changes in technology
• Productivity improvements from technological progress
58
29
1/29/2024
Using AD & AS to Depict LR Growth and Inflation

LRAS2000
Over the long run, P LRAS1990
tech. progress shifts LRAS1980
LRAS to the right
and growth in the P2000

money supply shifts P1990
AD to the right. AD2000
P1980
Result: AD1990
AD1980
ongoing inflation and Y
Y1980 Y1990 Y2000
growth in output.
59
Short Run Aggregate Supply (SRAS)

The SRAS curve P
is upward sloping:
Over the period SRAS
of 1-2 years,
an increase in P P2
causes an P1
increase in the
quantity of g & s
supplied. Y
Y1 Y2
60
30
1/29/2024
Why the Slope of SRAS Matters

P LRAS
If AS is vertical,
fluctuations in AD Phi
SRAS
do not cause
fluctuations in output or Phi
employment.
ADhi
If AS slopes up, Plo
then shifts in AD AD1
Plo
do affect output ADlo
Y
and employment. Ylo Y1 Yhi
61
Three Theories of SRAS

In each,
• some type of market imperfection
• result:
Output deviates from its natural rate
when the actual price level deviates
from the price level people expected.
62
31
1/29/2024
The Sticky-Wage Theory

• Imperfection:
Nominal wages are sticky in the short run,
they adjust sluggishly.
• Due to labor contracts, social norms
• Firms and workers set the nominal wage in advance
based on PE, the price level they expect to prevail.
63
The Sticky-Wage Theory

• If P > PE,
revenue is higher, but labor cost is not.
Production is more profitable, so firms increase output and
employment.
• Hence, higher P causes higher Y, so the SRAS curve
slopes upward.
64
32
1/29/2024
The Sticky-Price Theory

• Imperfection:
Many prices are sticky in the short run.
• Due to menu costs, the costs of adjusting prices.
• Examples: cost of printing new menus, the time required
to change price tags
• Firms set sticky prices in advance based on PE.
65
The Sticky-Price Theory

• Suppose the Fed increases the money supply unexpectedly.
In the long run, P will rise.
• In the short run, firms without menu costs can raise their
prices immediately.
• Firms with menu costs wait to raise prices. Meantime, their
prices are relatively low,
which increases demand for their products,
so they increase output and employment.
• Hence, higher P is associated with higher Y,
so the SRAS curve slopes upward.
66
33
1/29/2024
The Misperceptions Theory

• Imperfection:
Firms may confuse changes in P with changes
in the relative price of the products they sell.
• If P rises above PE, a firm sees its price rise before realizing all
prices are rising.
The firm may believe its relative price is rising,
and may increase output and employment.
• So, an increase in P can cause an increase in Y,
making the SRAS curve upward-sloping.
67
What the 3 Theories Have in Common:

In all 3 theories, Y deviates from YN when
P deviates from PE.
Y = YN + a (P – PE)
Output Expected
price level
Natural rate
of output
a > 0,
measures Actual
(long-run) price level
how much Y
responds to
unexpected
changes in P
68
34
1/29/2024
What the 3 Theories Have in Common:

Y = YN + a(P – PE)
P
SRAS
When P > PE
the expected
PE
price level
When P < PE
Y
YN
Y < YN Y > YN
69
SRAS and LRAS
• The imperfections in these theories are temporary. Over time,

• sticky wages and prices become flexible
• misperceptions are corrected
• In the LR,
• PE = P
• AS curve is vertical
70
35
1/29/2024
Why the SRAS Curve Might Shift

P LRAS
Everything that shifts SRAS
LRAS shifts SRAS, too. SRAS
Also, PE shifts SRAS: PE
If PE rises,
workers & firms set PE
higher wages.
At each P,
production is less Y
profitable, Y falls, SRAS YN
shifts left.
72
The Long-Run Equilibrium

P LRAS
In the long-run SRAS

equilibrium,
PE = P, PE
Y = YN ,
and unemployment AD
is at its natural rate. Y
YN
73
36
1/29/2024
Economic Fluctuations
• Caused by events that shift the AD and/or
AS curves.
• Four steps to analyzing economic fluctuations:
1. Determine whether the event shifts AD or AS.
2. Determine whether curve shifts left or right.
3. Use AD-AS diagram to see how the shift changes Y and P
in the short run.
4. Use AD-AS diagram to see how economy
moves from new SR eq’m to new LR eq’m.
74
The Effects of a Shift in AD
Event: Stock market crash P LRAS

1. Affects C, AD curve SRAS1
2. C falls, so AD shifts left
3. SR eq’m at B. P1 A SRAS2
P and Y lower,
P2 B
unemp higher
AD1
4. Over time, PE falls, P3 C
SRAS shifts right, AD2
until LR eq’m at C. Y
Y2 YN
Y and unemp back
at initial levels.
75
37
1/29/2024
Two Big AD Shifts:

1. The Great Depression
From 1929-1933, U.S. Real GDP,
• money supply fell 28% 900
850
due to problems in 800
banking system 750
700
• stock prices fell 90%, 650
reducing C and I 600

550
1929
1930
1931
1932
1933
1934
• Y fell 27%
• P fell 22%
• u-rate rose
from 3% to 25%
76
Two Big AD Shifts:

2. The World War II Boom
From 1939-1944, U.S. Real GDP,

• govt outlays rose 2,000
1,800
from $9.1 billion 1,600
to $91.3 billion 1,400
1,200
• Y rose 90% 1,000
• P rose 20% 800

1939
1940
1941
1942
1943
1944
• unemp fell
from 17% to 1%
77
38
1/29/2024
ACTIVE LEARNING 2
Working with the model
• Draw the AD-SRAS-LRAS diagram for the U.S. economy

starting in a long-run equilibrium.
• A boom occurs in Canada.
Use your diagram to determine the SR and LR effects on
U.S. GDP, the price level, and unemployment.
78
ACTIVE LEARNING 2
Answers
Event: Boom in Canada P LRAS
1. Affects NX, AD curve SRAS2
2. Shifts AD right
3. SR eq’m at point B. P3 C SRAS1
P and Y higher, P2 B
unemp lower
P1 A AD2
4. Over time, PE rises,
SRAS shifts left, AD1
until LR eq’m at C. Y
YN Y2
Y and unemp back
at initial levels.
79
39
1/29/2024
The Effects of a Shift in SRAS

Event: Oil prices rise
1. Increases costs, P LRAS
shifts SRAS
(assume LRAS constant) SRAS2
2. SRAS shifts left SRAS1

B
3. SR eq’m at point B. P2
P higher, Y lower,
unemp higher P1 A
From A to B, stagflation,
a period of AD1
falling output Y
Y 2 YN
and rising prices.
80
Accommodating an Adverse Shift in SRAS

If policymakers do nothing,
4. Low employment
P LRAS
causes wages to fall, SRAS
shifts right, SRAS2
until LR eq’m at A.
P3 C SRAS1
B
Or, policymakers could P2
use fiscal or monetary P1 A
policy to increase AD AD2
and accommodate the
AS shift: AD1
Y
Y back to YN, but Y 2 YN
P permanently higher.
81
40
1/29/2024
The 1970s Oil Shocks and Their Effects
1973-75 1978-80
Real oil prices + 138% + 99%
CPI + 21% + 26%
Real GDP – 0.7% + 2.9%
# of unemployed + 3.5 + 1.4

persons million million
82
John Maynard Keynes, 1883-1946
• The General Theory of Employment,

Interest, and Money, 1936
• Argued recessions and depressions
can result from inadequate demand;
policymakers should shift AD.
• Famous critique of classical theory:
The long run is a misleading guide
to current affairs. In the long run,
we are all dead. Economists set themselves
too easy, too useless a task if in tempestuous seasons
they can only tell us when the storm is long past,
the ocean will be flat.
83
41
1/29/2024

Aggregate Supply and Demand
Determine the Major
Macroeconomic Variables
84

Aggregate Price and Output Are Determined by the Interaction
of Aggregate Supply
• How does the economy
reach its equilibrium?
Indeed, what do we mean by
equilibrium?
• A macroeconomic
equilibrium is a combination
of overall price and quantity
at which all buyers and
sellers are satisfied with their
overall purchases, sales, and
prices
85
42
1/29/2024

 AS and AD curves have the same
shapes as the familiar supply and
demand curves analyzed in
microeconomics.
 The overall macroeconomic
equilibrium, determining both
aggregate price and output, comes
where the AS and AD curves
intersect. At the equilibrium price
level, purchasers willingly buy what
businesses willingly sell. Equilibrium
output can depart from full
employment or potential output. 86

 AS and AD curves have the same
shapes as the familiar supply and
demand curves analyzed in
microeconomics.
 The overall macroeconomic
equilibrium, determining both
aggregate price and output, comes
where the AS and AD curves
intersect. At the equilibrium price
level, purchasers willingly buy what
businesses willingly sell. Equilibrium
output can depart from full
employment or potential output. 87
43
1/29/2024
 CONCLUSION
• The model of aggregate demand and aggregate supply
helps explain economic fluctuations.
• Keep in mind: these fluctuations are deviations from the
long-run trends explained by the models we learned in
previous chapters.
• In the next chapter, we will learn how policymakers can
affect aggregate demand with fiscal and monetary policy.
88
 CONCLUSION
• Short-run fluctuations in GDP and other macroeconomic

quantities are irregular and unpredictable. Recessions are
periods of falling real GDP and rising unemployment.
• Economists analyze fluctuations using the model of aggregate
demand and aggregate supply.
• The aggregate demand curve slopes downward because a
change in the price level has a wealth effect on consumption, an
interest-rate effect on investment, and an exchange-rate effect on
net exports.
89
44
1/29/2024
 CONCLUSION
• Anything that changes C, I, G, or NX – except a change in the

price level –
will shift the aggregate demand curve.
• The long-run aggregate supply curve is vertical because changes
in the price level do not affect output in the long run.
• In the long run, output is determined by labor, capital, natural
resources, and technology; changes in any of these will shift the
long-run aggregate supply curve.
90
 CONCLUSION
• In the short run, output deviates from its natural rate when
the price level is different than expected, leading to an
upward-sloping short-run aggregate supply curve. The three
theories proposed to explain this upward slope are the sticky
wage theory, the sticky price theory, and the misperceptions
theory.
• The short-run aggregate-supply curve shifts in response to
changes in the expected price level and to anything that
shifts the long-run aggregate supply curve.
91
45
1/29/2024
 CONCLUSION
• Economic fluctuations are caused by shifts in aggregate

demand and aggregate supply.
• When aggregate demand falls, output and the price level fall in
the short run. Over time, a change in expectations causes
wages, prices, and perceptions to adjust, and the short-run
aggregate supply curve shifts rightward. In the long run, the
economy returns to the natural rates of output and
unemployment, but with a lower price level.
92
 CONCLUSION
• A fall in aggregate supply results in stagflation – falling output

and rising prices.
Wages, prices, and perceptions adjust over time, and the
economy recovers.
93
46
1/29/2024
94
47

Chapter 1 Slide

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 1 Slide

Uploaded by

Copyright:

Available Formats

1/29/2024

CHAPTER 1: GENERAL INTRODUCTION

Goals and tools of macroeconomics

Aggregate supply and aggregate demand

CHAPTER 1: GENERAL INTRODUCTION

The whole of science is nothing more than a

 After going through this unit, students should be able to:

MICROECONOMICS VS. MACROECONOMICS

MICROECONOMICS VS. MACROECONOMICS

individual actions and behaviors

 decisions of individuals and firms to

MICROECONOMICS VS. MACROECONOMICS

 the study of how households and

MICROECONOMICS VS. MACROECONOMICS

MICROECONOMICS VS. MACROECONOMICS:

 Delves into broad trends rather than

MICROECONOMICS VS. MACROECONOMICS:

 The study of the economy as a whole,

MICROECONOMICS VS. MACROECONOMICS:

Macro Refers to the big picture

Both fields are equally important and have a huge impact

MICROECONOMICS VS. MACROECONOMICS:

SUBJECTS &METHODS OF MACROECONOMICS

SUBJECTS &METHODS OF MACROECONOMICS

real GDP per person in the United States 14

the U.S. inflation rate 15

The Unemployment Rate in the U.S. Economy 16

QUESTIONS FOR REVIEW

1. Explain the difference between macroeconomics and

OBJECTIVES AND INSTRUMENTS OF MACROECONOMICS

Basic objectives of macroeconomics

• Three central questions of macroeconomics

OBJECTIVES AND INSTRUMENTS OF MACROECONOMICS

high level and rapid growth

OBJECTIVES AND INSTRUMENTS OF MACROECONOMICS

OBJECTIVES AND INSTRUMENTS OF MACROECONOMICS

Production output grew at a high and

Create many jobs, reduce

Stabilize the exchange rate and

Government expenditures and

Foreign exchange Foreign currency supply and

1. Recessions are periods of

Recession: a period of declining real incomes and rising unemployment

Depression: a severe recession

 Output: The ultimate objective of economic activity is to

Actual and Potential GDP in the United States 31

AGGREGATE SUPPLY AND AGGREGATE DEMAND

What are economic fluctuations? What are their

AGGREGATE SUPPLY AND AGGREGATE DEMAND

Three Facts About Economic Fluctuations

12,000 U.S. real GDP,

6,000 The shaded

Three Facts About Economic Fluctuations

Three Facts About Economic Fluctuations

AGGREGATE SUPPLY AND AGGREGATE DEMAND

• Explaining these fluctuations is difficult, and the theory of

AGGREGATE SUPPLY AND AGGREGATE DEMAND

The Model of Aggregate Demand and Aggregate Supply

and eq’m output Y

The Aggregate-Demand (AD) Curve

Why the AD Curve Slopes Downward

The Wealth Effect (P and C )

The Interest-Rate Effect (P and I )

The Exchange-Rate Effect (P and NX )