CHAPTER 26

An Introduction to Macroeconomics

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 Chapter Contents
Performance and Policy
The Miracle of Modern Economic Growth
Saving, Investment, and Choosing between Present and Future
Consumption
Uncertainty, Expectations, and Shocks
How Sticky Are Prices?
Categorizing Macroeconomic Models Using Price Stickiness

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 Performance and Policy
Business Cycle: Recession
Real GDP: Corrects for price changes
Nominal GDP: Uses current prices
Unemployment
Inflation: Increase in overall level of prices

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 Modern Economic Growth
Standard of living measured by output per person
No growth in living standards prior to Industrial
Revolution
Modern economic growth:
• Output per person rises
• Not experienced by all countries

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 Global Perspective 26.1

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©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education. Source: The World Bank Group, 2017
 Saving and Investment
Saving: Trade-off current for future consumption
Investment
• Financial investment
• Economic investment
Banks and financial institutions

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 Uncertainty, Expectations, and Shocks
The importance of expectations and shocks
Expectations affect investment
Shocks: What happens is not what was expected
Demand shocks
Supply shocks

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 Demand 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
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 Demand Shocks and Flexible Prices

$40,000

Price

37,000
DH

DM
35,000
DL

0 900
Cars per week
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 Demand Shocks and Fixed Prices

Price

$37,000

DH

DM

DL

700 900 1,150

Cars per week
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 How Sticky Are Prices?
Inflexible prices/sticky prices
Flexible prices: Examples: corn, oil, natural gas

LO26.5 26-11

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 Average Number of Months between Price Changes in
Selected Industries 
Industry Months
Services 11.3
Manufacturing 8.1
Finance 7.1
Utilities 4.7
Retail 4.6
Agriculture 3.2

Source: Yuriy Gorodnichenko and Michael Weber, “Are Sticky Prices Costly? Evidence from the
Stock Market,” American Economic Review, January 2016, pp. 165–199. Used with permission
of The University of Chicago Press via Copyright Clearance Center.
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 Sticky Prices: Consumers and Firms
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.

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 Categorizing Macroeconomic Models Using
Price Stickiness
Sticky prices rather than stuck.
Aggregate expenditures model.
Aggregate demand-aggregate supply model.

LO26.6 26-14

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 Last Word: The Behavioral Economics of
Sticky Prices
Reasons for sticky prices:
• Consumer preference
• Business price wars
Wages and salaries 70% of costs.
Reductions in per-unit labor costs self-defeating.
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