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PART IV CONCEPTS AND PROBLEMS
IN MACROECONOMICS
Introduction to
Macroeconomics
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CHAPTER 20 Introduction to Macroeconomics
CHAPTER OUTLINE
Macroeconomic Concerns
Output Growth
Unemployment
Inflation and Deflation
The Components of the Macroeconomy
The Circular Flow Diagram
The Three Market Arenas
The Role of the Government in the
Macroeconomy
A Brief History of Macroeconomics
The U.S. Economy Since 1970
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CHAPTER 20 Introduction to Macroeconomics
Terms and Concepts:
aggregate behavior: toplam davranış (tavır, hareket)
aggregate demand: toplam talep
aggregate output: toplam çıktı
aggregate supply: toplam arz
business cycle: konjonktür dalgalanmaları
circular flow: döngüsel akım
contraction, recession, or slump: ekonomik küçülme (daralma,
durgunluk)
corporate bonds: şirket tahvilleri
deflation: deflasyon, sönme, para darlığı
depression: ekonomik bunalım (durgunluk, kriz)
dividends: kar payları, temettü
expansion or boom: büyüme, genişleme, ekonomik canlılık, patlama
fine tuning: ince ayar
fiscal policy: mali politika, maliye politikası
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
CHAPTER 20 Introduction to Macroeconomics
Terms and Concepts:
Great Depression: büyük bunalım-buhran
hyperinflation: aşırı (yüksek,hiper) enflasyon
Inflation: enflasyon, şişme, para şişkinliği
macroeconomics: makroekonomi
microeconomic foundations of macroeconomics:
makroekonominin mikroekonomik temelleri
microeconomics: mikroekonomi
monetary policy: para politikası
shares of stock: hisse senedi
stagflation: stagflasyon, durgunluk içinde enflasyon
sticky prices: fiyat değişmelerinin yavaşlığı, fiyatların yapışkanlığı
supply-side policies: arz yanlı politikalar
transfer payments: transfer ödemeleri
treasury bonds, notes, bills: hazine bonosu
unemployment rate: işsizlik oranı
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Introduction to Macroeconomics
CHAPTER 20 Introduction to Macroeconomics
microeconomics Examines the functioning of individual
industries and the behavior of individual decision-making
units—firms and households.
macroeconomics Deals with the economy as a whole.
Macroeconomics focuses on the determinants of total
national income, deals with aggregates such as
aggregate consumption and investment, and looks at the
overall level of prices instead of individual prices.
aggregate behavior The behavior of all households and
firms together.
Microeconomists generally conclude that markets work
well. Macroeconomists, however, observe that some
important prices often seem “sticky.”
sticky prices Prices that do not always adjust rapidly to
maintain equality between quantity supplied and quantity
demanded.
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CHAPTER 20 Introduction to Macroeconomics
Introduction to Macroeconomics
Macroeconomists often reflect on the
microeconomic principles underlying
macroeconomic analysis, or the
microeconomic foundations of
macroeconomics.
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The Roots of Macroeconomics
The Great Depression was a period of severe economic contraction
and high unemployment for 1929 and the 1930s.
CHAPTER 20 Introduction to Macroeconomics
Classical economists applied microeconomic models, or “market
clearing” models, to economy-wide problems.
However, simple classical models failed to explain the prolonged
existence of high unemployment during the Great Depression.
This provided the impetus for the development of macroeconomics.
In 1936, John Maynard Keynes published The General Theory of
Employment, Interest, and Money.
Keynes believed governments could intervene in the economy and
affect the level of output and employment.
During periods of low private demand, the government can stimulate
aggregate demand to lift the economy out of recession.
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CHAPTER 20 Introduction to Macroeconomics
Which of the following statements is correct?
a.
Macroeconomics examines the behavior of individual
industries.
b.
Both macroeconomics and microeconomics are concerned
with the decisions of households and firms.
c.
Microeconomists look for macroeconomic foundations to
explain why most markets arrive at equilibrium.
d. All of the above.
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CHAPTER 20 Introduction to Macroeconomics
Which of the following statements is correct?
a.
Macroeconomics examines the behavior of individual
industries.
b. Both macroeconomics and microeconomics are
concerned with the decisions of households and firms.
c.
Microeconomists look for macroeconomic foundations to
explain why most markets arrive at equilibrium.
d. All of the above.
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Macroeconomic Concerns
CHAPTER 20 Introduction to Macroeconomics
Three of the major concerns of
macroeconomics are
•
Output growth
•
Unemployment
•
Inflation and deflation
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CHAPTER 20 Introduction to Macroeconomics
For economists, the main measure of how an economy is doing is:
a.
Aggregate output.
b.
Aggregate employment.
c.
The aggregate price level.
d. The growth rate of the population.
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CHAPTER 20 Introduction to Macroeconomics
For economists, the main measure of how an economy is doing is:
a.
Aggregate output.
b.
Aggregate employment.
c.
The aggregate price level.
d. The growth rate of the population.
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Macroeconomic Concerns
Output Growth
CHAPTER 20 Introduction to Macroeconomics
business cycle The cycle of short-term ups and downs in
the economy.
The main measure of how an economy is doing is
aggregate output:
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.
Policy makers attempt not only to smooth fluctuations in
output during a business cycle but also to increase the
growth rate of output in the long-run.
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Macroeconomic Concerns
Output Growth
CHAPTER 20 Introduction to Macroeconomics
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.
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Expansion and Contraction:
The Business Cycle
CHAPTER 20 Introduction to Macroeconomics
•
•
An expansion, or boom, is the
period in the business cycle from
a trough up to a peak, during
which output and employment
rise.
A contraction, recession, or
slump is the period in the
business cycle from a peak down
to a trough, during which output
and employment fall.
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Macroeconomic Concerns
Output Growth
CHAPTER 20 Introduction to Macroeconomics
 FIGURE 20.1 A Typical Business Cycle
In this business cycle, the
economy is expanding as
it moves through point A
from the trough to the
peak.
When the economy moves
from a peak down to a
trough, through point B,
the economy is in
recession.
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Macroeconomic Concerns
CHAPTER 20 Introduction to Macroeconomics
Output Growth
 FIGURE 20.2 U.S. Aggregate Output (Real GDP), 1900–2007
The periods of the Great Depression and World Wars I and II show the largest fluctuations in
aggregate output.
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Macroeconomic Concerns
Unemployment
unemployment rate The percentage of the labor force that is
unemployed.
The unemployment rate is the percentage of the labor force that is
unemployed.
CHAPTER 20 Introduction to Macroeconomics
The unemployment rate is a key indicator of the economy’s health.
The existence of unemployment seems to imply that the aggregate labor
market is not in equilibrium. Why do labor markets not clear when other
markets do?
Inflation and Deflation
inflation An increase in the overall price level.
hyperinflation A period of very rapid increases in the overall price
level. Hyperinflations are rare, but have been used to study the costs
and consequences of even moderate inflation
deflation A decrease in the overall price level.
Prolonged periods of deflation can be just as damaging for the economy
as sustained (prolonged) inflation
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CHAPTER 20 Introduction to Macroeconomics
In microeconomic theory, which of the following happens as the
labor market eliminates unemployment and restores its
equilibrium?
a.
The equilibrium wage rises above the wage that prevailed
when there was unemployment.
b. As it moves toward equilibrium, the market experiences an
increase in the quantity of labor demanded and a decrease in
the quantity supplied.
c.
The market will turn a shortage into a surplus.
d.
Supply and demand will shift, but equilibrium price remain the
same in the end.
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CHAPTER 20 Introduction to Macroeconomics
In microeconomic theory, which of the following happens as the
labor market eliminates unemployment and restores its
equilibrium?
a.
The equilibrium wage rises above the wage that prevailed
when there was unemployment.
b. As it moves toward equilibrium, the market experiences
an increase in the quantity of labor demanded and a
decrease in the quantity supplied.
c.
The market will turn a shortage into a surplus.
d.
Supply and demand will shift, but equilibrium price remain the
same in the end.
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The Components of the Macroeconomy
CHAPTER 20 Introduction to Macroeconomics
Macroeconomics focuses on four groups. To see
the big picture, it is helpful to divide the
participants in the economy into four broad
groups:
(1) households,
(2) firms,
(3) the government, and
(4) the rest of the world.
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The Components of the Macroeconomy
The Circular Flow Diagram
circular flow A diagram showing the income received
and payments made by each sector of the economy.
CHAPTER 20 Introduction to Macroeconomics
Everyone’s expenditure is someone else’s receipt. Every
transaction must have two sides.
transfer payments Cash payments made by the
government to people who do not supply goods, services, or
labor in exchange for these payments. They include Social
Security benefits, veterans’ benefits, and welfare payments.
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The Components of the Macroeconomy
The Circular Flow Diagram
CHAPTER 20 Introduction to Macroeconomics
 FIGURE 20.3 The Circular Flow of Payments
Households receive income from firms
and the government, purchase goods
and services from firms, and pay taxes
to the government. They 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. The government receives
taxes from firms and households, pays
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 produced
domestically (exports).
Note: Although not shown in this
diagram, firms and governments also
purchase imports.
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The Components of the Macroeconomy
The Three Market Arenas
CHAPTER 20 Introduction to Macroeconomics
Another way of looking at the ways households,
firms, the government, and the rest of the world
relate to each other is to consider the markets in
which they interact in threedifferent market arenas.
We divide the markets into three broad arenas:
(1) the goods-and-services market,
(2) the labor market, and
(3) the money (financial) market.
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The Components of the Macroeconomy
The Three Market Arenas
Goods-and-Services Market
CHAPTER 20 Introduction to Macroeconomics
Firms supply to the goods-and-services market.
Households, the government, and firms demand from
this market.
Labor Market
In this market, households supply labor and firms and
the government demand labor.
The total supply of labor in the economy depends on
the sum of decisions made by households.
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The Components of the Macroeconomy
The Three Market Arenas
Money Market (sometimes called the financial market)
CHAPTER 20 Introduction to Macroeconomics
Households supply funds to this market in the
expectation of earning income in the form of
dividends on stocks and interest on bonds.
Firms, the government, and the rest of the world
also engage in borrowing and lending which is
coordinated by financial institutions.
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The Components of the Macroeconomy
The Three Market Arenas
Money Market
CHAPTER 20 Introduction to Macroeconomics
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.
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CHAPTER 20 Introduction to Macroeconomics
All of the following are debt instruments, or promissory notes
issued by a borrower, except one. Which one?
a.
Treasury bonds.
b.
Treasury notes.
c.
Treasury bills.
d.
Corporate Stocks.
e.
Corporate bonds.
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CHAPTER 20 Introduction to Macroeconomics
All of the following are debt instruments, or promissory notes
issued by a borrower, except one. Which one?
a.
Treasury bonds.
b.
Treasury notes.
c.
Treasury bills.
d. Corporate Stocks.
e.
Corporate bonds.
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The Components of the Macroeconomy
The Role of the Government in the Macroeconomy
CHAPTER 20 Introduction to Macroeconomics
fiscal policy Government policies concerning
taxes and spending.
monetary policy The tools used by the Federal
Reserve to control the quantity of money, which
in turn affects interest rates.
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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.
CHAPTER 20 Introduction to Macroeconomics
fine-tuning The phrase used by Walter Heller to refer to the
government’s role in regulating inflation and unemployment.
The use of Keynesian policy to fine-tune the economy in the
1960s, led to disillusionment in the 1970s and early 1980s.
stagflation A situation of both high inflation and high
unemployment.
Stagflation occurs when the overall price level rises rapidly
(inflation) during periods of recession or high and persistent
unemployment (stagnation).
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CHAPTER 20 Introduction to Macroeconomics
Which of the following ideas was central in Keynesian theory?
a.
The invisible hand. The forces of supply and demand ensure
that a market will quickly adjust to deviations from equilibrium.
b.
Self-correcting prices and wages determine the level of
output and employment in the economy.
c.
Government intervention can be used to affect the level of
output and employment in the economy.
d.
Monetary policy can bring the economy out of a recession, or
a depression.
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CHAPTER 20 Introduction to Macroeconomics
Which of the following ideas was central in Keynesian theory?
a.
The invisible hand. The forces of supply and demand ensure
that a market will quickly adjust to deviations from equilibrium.
b.
Self-correcting prices and wages determine the level of
output and employment in the economy.
c.
Government intervention can be used to affect the level
of output and employment in the economy.
d.
Monetary policy can bring the economy out of a recession, or
a depression.
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A Brief History of Macroeconomics
CHAPTER 20 Introduction to Macroeconomics
Macroeconomics in
Literature
The underlying phenomena that
economists study are the stuff of
novels as well as graphs and
equations.
The Great Gatsby
The Grapes of Wrath
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The U.S Economy Since 1970
CHAPTER 20 Introduction to Macroeconomics
John Maynard Keynes
Much of the framework of
modern macroeconomics comes
from the works of John Maynard
Keynes, whose General Theory
of Employment, Interest and
Money was published in 1936.
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