Aggregate behavior behavior of all households and rms together Sticky prices prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded Macroeconomic Concerns Government policy makers would like to have high output growth low unemployment and low in ation Output Growth Business cycle cycle of short term ups and downs in economy Aggregate output total quantity of goods and services produced in economy in given period When less is produced aggregate output decreases there are fewer goods and services to go around and average standard of living declines When rms cut back on production they lay off workers increasing rate of unemployment Recession period during which aggregate output declines conventially a period in which aggregate output declines for 2 consecutive quarters Depression prolonged and deep recession Expansion or boom period in business cycle from a trough up to a peak during which output and employment grow Contraction recession or slump period in business cycle from a peak down to a trough during which output and employment fall Most business cycles are not symmetric or regular rather erratic Unemployment rate percentage of labor force unemployed When there is unemployment beyond some minimum amount there is an excess supply of workers at the going wage rates there are people who want to work but cannot nd work In ation and De ation Goal of gov t policy is to keep in ation low In ation increase in overall price level Hyperin ation period of very rapid increase in overall price level De ation decrease in overall price level Goal of policy makers is to avoid prolonged periods of de ation as well as in ation in order to pursue macroeconomic goal of stability The Components of the Macroeconomy The Circular Flow Diagram Circular ow diagram showing income received and payments made by each sector of economy Households work for rms and the government and they receive wages for Unemployment their work diagram shows ow of wages into households as payments for those services Households also receive interest on corporate and government bonds and dividends from rms many receive other payments from government such as social security bene ts veterans bene ts and welfare payments These are called transfer payments cash payments made by government to people who do not supply goods services or labor in exchange for these payments Households spend by buying goods and services from rms and paying taxes to government Difference between total receipts and total payments of the households is the amount that they save or dissave Receive more than spend save Spend more than receive dissave Household can dissave by using up some of its previous savings or by borrowing In diagram housing spending is shown as ow out of households Firms sell goods and services to households and government these earn revenue which shows up in diagram as ow into rm sector Firms pay wages interest and dividends to households and pay taxes to government these are shown owing out of rms Government collects taxes from households and rms and makes payments buys goods and services from rms pays wages and interest to households and makes transfer payments to households Households spend some of their income on imports goods and services produced in rest of world Foreign people purchase exports goods and services produced by domestic rms and sold to other countries Lesson everyone s expenditure is someone else s receipt If government s revenue is less than its payments it is dissaving The Three Market Arenas Goods and Services Market Households and government purchase goods and services from rms and rms purchase goods and services from each other Firms supply to goods and services market Households government and rms demand from market Rest of the world buys from and sells to market Firms and government purchase labor from households Labor Market Households supply labor and rms and government demand labor Total supply of labor depends on sum of decisions made by households individuals must decide whether to enter labor force and how many hours to work Labor is also supplied to and demanded from rest of world Call centers run by u s corporations staffed by labor in India Money Market Financial Market Households purchase stocks and bonds from rms Households supply funds to market in expectation of earning income in form of dividends on stocks and interest on bonds Households also demand borrow funds from this market to nance various purchases Firms borrow to build new facilities in hopes of earning more in future Government borrows by issuing bonds Most borrowing and lending is coordinated by nancial institutions commercial banks savings and loan associations insurance companies When rm household or government borrows to nance a purchas it has obligation to pay loan back usually at some speci ed time in future Most loans also involve payment of interest fee When loan is made borrower usually sins a promissory note a promise to repay and gives it to lender When fed government borrows it issues promises called treasury bonds nots or bills in exchange for money Firms can borrow by issuing corporate bonds Firms can also issue shares of stock nancial instruments that give to the holder a share in the rm s ownership and therefore the right to share in the rm s pro ts Stock may pay dividends portions of rm s pro ts that rm pays out each period to its shareholders Role of Government in the Macroeconomy Fiscal policy government policies concerning taxes and spending Expansionary scal policy taxes are cut and or government spending increases Contradictory scal policy taxes are raised and or government spending decreases Monetary policy tools used by fed reserve to control quantity of money which in turn affects interest rates Brief History of Macroeconomics Great Depression period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s According to John Keynes it is not prices and wages that determine level of employment as classical models suggested instead it is the level of aggregate demand for goods and services Believed that governments could intervene in economy and affect level of output and employment Government s role when private demand is low is to stimulate aggregate demand lifting economy out of recession Fine tuning phrase used by Walter Heller to the government s role in regulating in ation and unemployment Stag
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