Introduction to Macroeconomics

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Andreea CHIRITESCU
Eastern Illinois University

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Economics
Microeconomics
Study of how households and firms
Make decisions
Interact in markets

Macroeconomics
Study of economy-wide phenomena
Including inflation, unemployment, and

economic growth

2011 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.

C H A P T E R 17: Introduction to Macroeconomics

Macroeconomics and Microeconomics

Examples of microeconomic and macroeconomic concerns
Microeconomics

Macroeconomics

Production

Prices

Income

Employment

Production/Output
in Individual
Industries and
Businesses

Price of Individual
Goods and
Services

Distribution of
Income and Wealth

Employment by
Individual
Businesses &
Industries
Jobs in the steel
industry
Number of
employees in a
firm

How much steel

How many offices
How many cars

Price of medical
care
Price of gasoline
Food prices
Apartment rents

National
Production/Output

Aggregate Price
Level

Total Industrial
Output
Gross Domestic
Product
Growth of Output

Consumer prices
Producer Prices
Rate of Inflation

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Wages in the auto

industry
Minimum wages
Executive salaries
Poverty
National Income
Total wages and
salaries
Total corporate
profits

Karl Case, Ray Fair

Employment and
Unemployment in
the Economy
Total number of
jobs
Unemployment
rate

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The Roots of Macroeconomics

The Great Depression was a period of severe
economic contraction and high unemployment that
began in 1929 and continued throughout the
1930s.
The classical economists at that time were puzzled
about what caused it and were not sure how to
deal with it.
To them can be no overproduction or
unemployment because prices will adjust to equate
demand and supply in the goods and product
markets.
2011 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.

The Roots of Macroeconomics

In 1936, John Maynard Keynes published
The General Theory of Employment,
Interest, and Money.
He argued that the models of classical
economists were applicable in the long run
but not in the short run.
Recessions and depressions can occur in
the short run because of inadequate
aggregate demand for goods and services.
2011 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.

Long-Run Equilibrium
Price
Level
Long-run
aggregate
supply

Equilibrium
price

Aggregate
demand
0

Natural rate
of output

Quantity of
Output
2007 Thomson South-Western

The Short Run

Price
Level
Long-run
aggregate
supply

Short-run
aggregate
supply

Equilibrium
price

Aggregate
demand
0

Natural rate
of output

Quantity of
Output
2007 Thomson South-Western

A Contraction in Aggregate Demand

2. . . . causes output to fall in the short run . . .
Price
Level
Long-run
aggregate
supply

Short-run aggregate
supply, AS

P
B

P2

1. A decrease in
aggregate demand . . .
Aggregate
demand, AD
AD2

Y2

Quantity of
Output
2007 Thomson South-Western

The Roots of Macroeconomics

Keynes believed governments could
intervene in the economy and affect the
level of output and employment.
During periods of low private demand,
the government can stimulate
aggregate demand to lift the economy
out of a recession.

2011 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.

Increase in Aggregate Demand via Government Policies

Price
Level

LRAS
SRAS

P2
P1

D2
Aggregate
demand, D1
0

Y1

Y2

Quantity of
Output
2007 Thomson South-Western

C H A P T E R 17: Introduction to Macroeconomics

Macroeconomic Concerns
Three of the major concerns of
macroeconomics are:
Aggregate output growth
Aggregate prices and Inflation
Aggregate unemployment

In the long run and in the short

run

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

11 of 31

C H A P T E R 17: Introduction to Macroeconomics

Output Growth:
Short Run and Long Run
Macroeconomists want to know
what determines aggregate
output growth in the long run.
They also want to know what
determines the business cycle,
the cycle of short-term ups and
downs of aggregate output.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Output growth in the long run

Most economists today believe that
the long term growth in the output
and income of country depends on
productivity growth.
Productivity the quantity of goods
and services produced by each unit
of labor input.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Output growth in the short run

Changes in demand are a major
cause of the business cycle, the
irregular and largely unpredictable
fluctuations in economic activity.
Some of these fluctuations are due
to supply shocks, for instance, oil
price hikes, natural disasters, etc.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Expansion and Contraction:

The Business Cycle

2004 Prentice Hall Business Publishing

An expansion, or boom, is
the period in the business
cycle from a trough up to a
peak, during which output
and employment rise.
A contraction, recession,
or slump is the period in
the business cycle from a
peak down to a trough,
during which output and
employment fall.
Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Output Growth:
Short Run and Long Run
A recession is a period during which
aggregate output declines. Two
consecutive quarters of decrease in output
signal a recession.
A prolonged and deep recession becomes
a depression.
Governments attempt not only to smooth
fluctuations in output during a business
cycle but also to increase the growth rate
of output in the long-run.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Prices, Inflation and Deflation

Inflation is an increase in the overall price
level.
Hyperinflation is a period of very rapid
increases in the overall price level.
Hyperinflations are rare, but have been
used to study the costs and consequences
of even moderate inflation.
Deflation is a decrease in the overall price
level. Prolonged periods of deflation can be
just as damaging for the economy as
sustained inflation.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Prices in the long run and in the short

run
The classical economists believed
that money had no effect on real
output and on employment; money
only affects aggregate prices or the
inflation rate. This may be true for
the long run.
Keynesians believe that, in the
short run, changes in the money
supply can have an effect on real
output and employment.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Unemployment in the long run

In the long run, there will be some
unemployment called the natural rate
of unemployment.
Frictional unemployment caused

by job search.
Structural unemployment
caused by disequilibrium in labor
markets.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Unemployment in the short run

In the short run, unemployment may
deviate from the natural rate because of the
business cycle. This is called cyclical
unemployment.
Governments might be able to decrease
unemployment by reducing taxes and
spending more (fiscal policy) and increasing
the amount of money it injects into the
system (monetary policy).
Although prices will rise, unemployment
may fall. In the short run there is a tradeoff
between inflation and unemployment.

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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C H A P T E R 17: Introduction to Macroeconomics

Understanding the Macro-economy

Need to distinguish the
short run and the long run
Course topics are organized
to differentiate the two

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

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Outline of the Course

Measurement: Aggregate Output, Income and Prices,
Chapters 23-24
The Real Economy in the Long Run, Chapters 25-28
The determinants of output and productivity growth, Chapter 25
How the financial system works and how real interests rates adjust to
equate savings and investment, Chapter 26
Why there is some unemployment in the long run, Chapter 28

The Monetary System, Inflation and the Nominal Interest

Rate, Chapters 29-30
Open Economy Macroeconomics: How the trade balance
and exchange rates are determined, Chapters 31-32
Short Run Economic Fluctuations, Chapters 33-35

2011 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

C H A P T E R 17: Introduction to Macroeconomics

The End

2011
Cengage
Learning.
not
copied,
2004
Prentice
Hall Business
PublishingAll Rights
PrinciplesReserved.
of Economics, May
7/e
Karl be
Case,
Ray Fair scanned, or

23