23

An Introduction to Macroeconomics

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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 Objectives

• Why focus on GDP, inflation and unemployment

when assessing health of the economy.

• Identify savings and investment are key factors

in promoting rising living standards.

• Why economists believe that shocks and sticky

prices are responsible for short run fluctuations
in output and employment.
 Questions

• Why are some countries really rich while others are really
poor?

• Why do some countries enjoy sustained, long run increases

in living standards while other countries simply stagnate?

• Why do all countries- even the richest- go through alternating

boom and bust periods?

• And is there anything that governments can do to improve

living standards or fight recessions?
 Performance and Policy

• Long run economic growth and short run

fluctuations in output and employment (often
referred to as business cycle)
• Nominal GDP
• Uses current prices
• Real GDP
• Corrects for price changes
• More output greater consumption
possibilities

LO1 23-4
 Performance and Policy

• Unemployment
• High rate- undesirable- resources under utilized

• Inflation
• Increase in overall level of prices
• Cost more to buy the same goods
• If same income- reduces purchasing power- less people
can buy

LO1 23-5
 Performance and Policy
• Can governments:
• Promote economic growth?
• Reduce severity of recession?
• Is monetary or fiscal policy more
effective at mitigating recession?
• Is there a tradeoff between inflation
and unemployment?
• Is anticipated or unanticipated
government policy more effective?
LO2 23-6
 Modern Economic Growth

• Standard of living measured by output per

person
• No growth in living standards prior to Industrial
Revolution
• As increase in population was equal to
increase output
• Modern economic growth
• Output per person rises
• Not experienced by all countries

LO3 23-7
 Savings and Investment

• Savings->investment->growth
• Saving
• Trade-off current for future consumption
• Increase saving, reduce consumption
• Investment
• Financial investment
• Economic investment
• Banks and financial institutions

LO4 23-8
Uncertainty, Expectations, and Shocks

• Savings and investment decisions are

complicated since the future is uncertain
• Expectations affect investment
• Shocks
• What happens is not what you expected
• Demand shocks and Supply shocks
• Positive and negative demand shocks
(expected vs actual)

LO5 23-9
Uncertainty, Expectations, and Shocks

• Demand shocks and flexible prices

• Price falls if demand is low
• Sales unchanged
• Demand shocks and sticky prices
• Maintain inventory
• Sales change
• Business cycles

LO5 23-10
 Demand Shocks

Flexible
Prices
$40,000
Price

$37,000

$35,000

DM DH
DL
900
Cars Per Week
LO5 23-11
 Demand Shocks

Fixed Prices
Price

$37,000

DH
DM
DL
700 900 1150
Cars Per Week
LO5 23-12
 Sticky Prices

• Many prices are sticky in the short run

• Consumers prefer stable prices
• Firms want to avoid price wars
• All prices are flexible in the long run
• Firms adjust to unexpected, but
permanent changes in demand

LO5 23-13