Econ Midterm 1 Chapter 5 Great Depression o Worldwide economic crisis o Total amount of goods and services produced in the US fell by 33 o Unemployment up to 25 General Theory of Employment Interest and Money o Replaces classical theory by model based on Aggregate demand Wage and price rigidities Slow adjustments o Birth of macroeconomics as field separate from microeconomics John Maynard Keynes o Keynes believed government should intervene in the economy and affect the level of output and employment Keynes was not a socialist He was a capitalist Simply felt capitalism could be unstable During periods of low private demand the government should can stimulate aggregate total demand to lift the economy out of recession Classical view of macro o Prices adjust to clear markets o Economy is at full employment No unemployment o Macro questions were considered to be solved o Most work was on macro From classical to Keynes o Great depression events were opposite of what classical theory predicted Crisis in macro Components of macro o Macro focuses on 4 groups Households you and me We supply labor services and buy Business firms they higher services of households and make stuff the stuff Government the public sector Rest of the world exports and imports Microeconomics Macroeconomics o Examines the functioning of individual industries and the behavior of individual decision making units business firms and households o Deals with the economy as a whole o Focuses on the determinants of total national income o Deals with aggregates such as aggregate consumption and investment o Looks at the overall level of prices instead of individual prices Intro to macro together o Aggregate behavior the behavior of all households and firms o Sticky prices prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded o Three major concerns of macro Output growth what we produce and can we keep it growing Unemployment Inflation and deflation Concerns o Output growth economy Business cycle the cycle of short term ups and downs in the Aggregate output the total quantity of goods and services produced in an economy in a given period Recession a period during which aggregate output declines Conventionally a period in which aggregate output declines for two consecutive quarters Depression a prolonged and deep recession Expansion or boom the period in the business cycle from a trough up to a peak during which output and employment grow Contraction recession or slump the period in the business cycle from a peak down to a trough during which output and employment fall o Unemployment Unemployment rate the percentage of the labor force that is unemployed Unemployed labor force o Inflation and deflation Inflation an increase in the overall price level Hyperinflation a period of very rapid increases in the overall price level Deflation a decrease in the overall price level Inflation is measured as the percent increase in the overall price level per year Components of macro o Circular flow diagram Circular flow a diagram showing the 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 Include Social Security benefits veterans benefits and welfare payments Households receive income from firms and the government purchase goods and services from firms and pay taxes to the government Also purchase foreign made goods and services imports Firms receive payments from households and the government for goods and services they pay wages dividends interest and rents to households and taxes to the government Government receives taxes from firms and households for goods and services including wages to government workers and pays interest and transfers to households Finally people in other countries purchase goods and services domestically exports Firms and governments also purchase imports o Three market arenas Goods and services market Firms supply to the goods and services market Households the government and firms demand from this market Labor market Households supply labor Firms and government demand labor Money financial market Money market Households supply funds in the expectation of earning income in the form of interest on a bank account dividends on stocks and interest on bonds Much of borrowing and lending of households firms the government and the rest of the world are coordinated by financial institutions Treasury bonds notes and bills promissory notes issued by the federal government when it borrows money Corporate bonds promissory notes issued by firms when they borrow money 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 Dividends the portion of a firm s profits that the firm pays out each period to its shareholders o Role of government spending Fiscal policy government policies concerning taxes and Monetary policy the tools used by the federal reserve to control the quantity of money which in turn affects interest rates History o Great Depression period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s o Fine tuning the phrase used by Walter Heller to refer to the government s role in regulating inflation and unemployment o Stagflation a situation of both high inflation and high unemployment Terms and concepts o Aggregate behavior o Aggregate output o Business cycle o Circular flow o Contraction recession or slump o Corporate bonds o Deflation o Depression o Dividends o Expansion or boom o Fine tuning o Fiscal policy o Great Depression o Hyperinflation o Inflation o Macroeconomics o Microeconomics o Monetary policy o Recession o Shares of stock o Stagflation o Sticky prices o Transfer payments o Treasury bonds notes and bills o Unemployment rate Chapter 6 Measuring national output and national income o National income and product accounts NIPA Data collected and published by the government describing the various components of national income and output in the economy o Gross Domestic Product GDP Total market value of all final goods and services produced within a given period by factors of production located within a country Final goods and services goods and services produced for final use Intermediate goods goods that are produced by one firm for use in further
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