Principles of Macroeconomics Chapter 1 What Macroeconomics Tries to Explain Vocabulary 1 Recession a period of significant decline in real GDP 2 Economic Growth the increase in our production of goods and services that occurs over long periods of time 3 Aggregation the process of combining different things into a single category 4 Business Cycles fluctuations in real GDP around its long term growth trend 5 Expansion a period of increasing real GDP 6 Depression an unusually severe recession 7 Real GDP the total quantity of goods and services produced in a country over a 8 Real GDP per Capita real GDP population 9 Unemployment Rate the percentage of the workforce that is searching for a job year but hasn t found one 10 Annual Inflation Rate the percentage increase in the average level of prices 11 Deflation negative rate of inflation 12 Laissez faire leave it alone Notes Macroeconomic Goals Economic Growth Economic growth increasing the size of the overall pie is the increase in our production of goods and services that occurs over long periods of time o Monitored using real gross domestic product real GDP the total quantity of goods and services produced in a country over a year Rise in real GDP Rise in population Output per person rises Rise in average standard of living Although output has grown the rate of growth has varied over the decades High Employment or Low Unemployment Why is there a concern for those without jobs o Unemployment affects the distribution of economic well being among our citizens People who cannot find jobs suffer a loss of income o A high unemployment rate means that the economy is not achieving its full economic potential The higher the unemployment rate the lower the standard of living Economists keep track of unemployment using the unemployment rate Laws concerning unemployment o Employment Act of 1946 required the federal government to promote maximum employment production and purchasing power o Full Employment and Balanced Growth Act of 1978 called for an unemployment rate of 4 Employment and the Business Cycle Real GDP and employment are closely related o Each 1 drop in real GDP Loss of half a million jobs From 1929 to 1933 the first four years of the Great Depression U S output dropped by more than 25 percent Consistently high employment requires a stable level of output o However output is not stable There are periodic fluctuations in real GDP called business cycles o When output rises we are in an expansion phase when output falls we are in a contraction or a recession When a recession is particularly severe and long lasting it is called Stable Prices a depression Annual Inflation Rate is the percentage increase in the average level of prices o In past years the inflation rate has been positive o Inflation is costly The purchasing power of the currency declines so rapidly that people are no longer willing to hold it or accept it from others This leads people to find trading partners ultimately lowering the average standard of living o According to economists some inflation it good Aggregation is the process of combining different things into a single category Macroeconomic Approach Aggregation in Macroeconomics and treating them as a whole o Tool of reasoning o Examples Macroeconomists aggregate all markets into the broadest possibly categories Investment goods forklifts factory buildings office computers Consumption goods pizza couches haircuts medical care Labor doctors construction workers teachers Output Real GDP consumption AND investment Macroeconomic Controversies The General Theory of Employment Interest and Money John Keynes o Introduced modern macroeconomics o Argued against classical economics which stated that macroeconomies worked well on there own and the best policy for the government to follow was laissez faire leave it alone o Keynes believed that that the economy did not work well on its own and requires guidance The Great Depression provided significant evidence of this Positive vs Normative statements o P What is Fact o N What should be Opinion
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