Econ 103 Ch 5 Microeconomics examines behavior of individual units Macroeconomics examines the behavior of economic aggregates such as aggregate income consumption investment and the overall level of prices Sticky prices are prices that do not adjust rapidly to maintain equilibrium between supply and demand Great Depression began in 1929 and continued throughout the 1930s 1936 John Maynard Keynes published The General Theory of Employment Interest and Money Keynes believed in government intervention in the economy to affect output and employment Fine tuning Walter Heller used to refer to government s role in regulating inflation and unemployment Stagflation inflation with stagnation high unemployment Macroeconomics concerns output growth unemployment and inflation Recession period during which aggregate output declines Two consecutive quarters of decrease in output signals a recession Prolonged and deep recession becomes a depression Macroeconomists use microeconomic foundations so as to make macroeconomic analysis consistent with microeconomic postulates In a diagram of labor supply and labor demand curves we measure units of labor along the horizontal axis and wage rate along the vertical axis To fund its budget deficit the govn t can borrow by selling treasury bills to the public The circular flow diagram shows the income received and payments made by each sector of the economy firms households government and the rest of the business cycle Fiscal policy deals with taxes and spending Monetary policy consists of tools used by the Federal Reserve to control the money supply interest rates in the economy Growth policies focus on stimulating aggregate supply instead of aggregate demand Reaganomics Decreasing corporate taxes and regulations thereby lowering production costs are examples Macroeconomics study goods and services market labor market and money market 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 Classical economists believe that prices and wages are flexible while Keynesians believe that they are sticky Classical model is based on the critical assumption that markets are always clear Increase in output but decline in employment can be explained by increase in labor productivity Expansionary periods during 20th C occurred during wars because increased govnt spending at wartime Taxpayer Relief Act of 1997 lower tax more income incentive to work harder and save is known as supply side economics Reaganomics
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