Introduction To Macroeconomics: © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

1
CHAPTER 16
Introduction to
Macroeconomics
Prepared by: Fernando Quijano

and Yvonn Quijano
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Macroeconomics
• Macro economics deals with the

economy as a whole. It studies the
behavior of economic aggregates
such as aggregate income,
consumption, investment, and the
overall level of prices.
• Aggregate behavior refers to the behavior
of all households and firms together.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 2
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 Roots of Macroeconomics
• Classical economists applied

microeconomic models, or “market
clearing” models, to economy-wide
problems.
• The failure of simple classical models

to explain the prolonged existence of
high unemployment during the Great
Depression provided the impetus for
the development of macroeconomics.
Recent Macroeconomic History
• In 1936, John Maynard Keynes

published The General Theory of
Employment, Interest, and Money.
• Keynes believed governments could
intervene in the economy and affect
the level of output and employment.
• Fine tuning was the phrase used by
Walter Heller to refer to the
government’s role in regulating
inflation and unemployment.
Recent Macroeconomic History
• The use of Keynesian policy to fine-

tune the economy in the 1960s, led
to disillusionment in the 1970s and
early 1980s.
• Stagflation occurs when the overall

price level rises rapidly (inflation)
during periods of recession or high
and persistent unemployment
(stagnation).
Macroeconomic Concerns
• Three of the major concerns of

macroeconomics are:
• Inflation
• Output growth
• Unemployment
Inflation
• 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.
Output Growth
• The business cycle is the cycle of

short-term ups and downs in the
economy.
• The main measure of how an

economy is doing is aggregate
output:
• Aggregate output is the total quantity
of goods and services produced in an
economy in a given period.
Output Growth
• 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.
• The size of the growth rate of output

over a long period is also a concern of
macroeconomists and policy makers.
Unemployment
• The unemployment rate is the

percentage of the labor force that is
unemployed.
• The unemployment rate is a key
indicator of the economy’s health.
• The existence of unemployment
seems to imply that the aggregate
labor market is not in equilibrium.
Why do labor markets not clear
when other markets do?
Government in the Macroeconomy
• There are three kinds of policy

that the government has used to
influence the macroeconomy:
1. Fiscal policy
2. Monetary policy
3. Growth or supply-side policies
Government in the Macroeconomy
• Fiscal policy refers to government

policies concerning taxes and
expenditures.
• Monetary policy consists of tools used

by the Federal Reserve to control the
money supply.
• Growth policies are government policies

that focus on stimulating aggregate
supply instead of aggregate demand.
The Components of the Macroeconomy
• The circular flow

diagram shows the
income received and
payments made by
each sector of the
economy.
The Components of the Macroeconomy
• Everyone’s
expenditures go
somewhere. Every
transaction must
have two sides.
The Three Market Arenas
• Households, firms, the government, and the rest of the

world all interact in the goods-and-services, labor, and
money markets.
• Households and the government purchase

goods and services (demand) from firms in
the goods and services market, and firms
supply to the goods and services market.
• In the labor market, firms and government

purchase (demand) labor from households
(supply).
• The total supply of labor in the economy
depends on the sum of decisions made by
households.
• In the money market—sometimes called

the financial market—households purchase
stocks and bonds from firms.
• Households supply funds to this market in

the expectation of earning income, and also
demand (borrow) funds from this market.
• Firms, government, and the rest of the world

also engage in borrowing and lending,
coordinated by financial institutions.
Financial Instruments
• Treasury bonds, notes, and bills

are promissory notes issued by the
federal government when it borrows
money.
• Corporate bonds are promissory

notes issued by corporations when
they borrow money.
Financial Instruments
• Shares of stock are financial

instruments that give to the holder a
share in the firm’s ownership and
therefore the right to share in the
firm’s profits.
• Dividends are the portion of a

corporation’s profits that the firm
pays out each period to its
shareholders.
The Methodology of Macroeconomics
• Connections to microeconomics:
• Macroeconomic behavior is the
sum of all the microeconomic
decisions made by individual
households and firms. We cannot
understand the former without
some knowledge of the factors
that influence the latter.
Aggregate Supply and
Aggregate Demand
• Aggregate demand is the

total demand for goods and
services in an economy.
• Aggregate supply is the

total supply of goods and
services in an economy.
• Aggregate supply and
demand curves are more
complex than simple
market supply and demand
curves.
Expansion and Contraction:
The Business Cycle
• 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.
Real GDP, 1900-2000
Real GDP, 1970 I-1997 II
Unemployment Rate, 1970 I-1997 II
Percentage Change in the GDP Price Index
(Four-Quarter Average), 1970 I-1997 II

Introduction To Macroeconomics: © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Uploaded by

Copyright:

Available Formats

Introduction To Macroeconomics: © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Uploaded by

Document Information

Original Title

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

Introduction To Macroeconomics: © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

Uploaded by

Copyright:

Available Formats

1

Prepared by: Fernando Quijano

• Macro economics deals with the

• The Great Depression

• Classical economists applied

• The failure of simple classical models

• In 1936, John Maynard Keynes

• The use of Keynesian policy to fine-

• Stagflation occurs when the overall

• Three of the major concerns of

• Inflation is an increase in the overall

• Hyperinflation is a period of very

• The business cycle is the cycle of

• The main measure of how an

• A recession is a period during which

• A prolonged and deep recession

• The size of the growth rate of output

• The unemployment rate is the

• There are three kinds of policy

3. Growth or supply-side policies

• Fiscal policy refers to government

• Monetary policy consists of tools used

• Growth policies are government policies

• The circular flow

• Households, firms, the government, and the rest of the

• Households and the government purchase

• In the labor market, firms and government

• In the money market—sometimes called

• Households supply funds to this market in

• Firms, government, and the rest of the world

• Treasury bonds, notes, and bills

• Corporate bonds are promissory

• Shares of stock are financial

• Dividends are the portion of a

• Aggregate demand is the

• Aggregate supply is the

You might also like