Chapter 5 Introduction to Macroeconomics Macroeconomics focuses on the determinants of total national output studies national income overall price level total employment Aggregate behavior behavior of all households and firms together Sticky prices are prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded Macroeconomic Concerns 3 major concerns output growth unemployment inflation and deflation Output growth o Business cycle the cycle of short term ups and downs in the economy o Aggregate output the total quantity of goods and services produced in an economy in a given period main measure of how an economy is doing when it decreases then there are fewer goods and services and the average standard of living decreases o Recessions a period during which aggregate output declines a period in which aggregate output declines for two consecutive quarters o Depression a prolonged and deep recession o Expansion boom the period in the business cycle from a trough up to a peak during which output and employment grow o Contraction recession slump the period in the business cycle from a peak down to a trough during which output and employment fall o Unemployment rate the percentage of labor force that is Unemployment unemployed Inflation and deflation o Inflation an increase in the overall price level goal keep low o Hyperinflations a period of very rapid increases in the overall price level o Deflation a decrease in the overall price level The Components of the Macroeconomy Participants of the economy households firms government rest of the world households firms private gov public rest of the world foreign Circular flow diagram a diagram showing that income received and payments made by each sector of the economy Transfer payments cash payments made by the government to people who do not supply goods services or labor in exchange for these payments includes social security benefits veterans benefits welfare payments Goods and services market households and the gov purchase goods and services from firms firms also purchase from other firms firms supply goods and services and households government firms demand goods and services Labor market firms and the gov purchase labor from households households supply labor and government demands labor Money market aka financial market households purchase stocks and bonds from firms households supply funds and demand funds o Treasury bonds notes bills promissory notes issued by the federal government when it borrows money o Corporate bonds promissory notes issued by firms when they borrow money o Shares of stock 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 o Dividends the portion of a firm s profits that the firm pays out each period to its shareholders o Interest rates Fiscal policy government policies concerning taxes and spending o Expansionary fiscal policy taxes are cut and gov spending increases o Contractionary fiscal policy opposite Monetary policy the tools used by the Federal Reserve to control the quantity of money which in turn affects interest rates A Brief History of Macroeconomics Great Depression the period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s Keynes it is not prices and wages that determine the level of employment but it is the level of aggregate demands for goods and services he believed the government could intervene and affect the level of output and employment gov should stimulate aggregate demand when private demand is low Fine tuning the phrase used by Walter Heller to refer to the government s role in regulating inflation and unemployment Stagflation a situation of both inflation and high unemployment The US Economy Since 1970 The US economy has experienced 5 recessions and 2 periods of high inflation
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