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Macro McEachern 2011 ECON 5 2010- CHAPTER Introduction to Designed by Amy McGuire, B-books, Ltd. Chapter 5 Macroeconomi cs Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved The National Economy Gross domestic product GDP Market value All final goods and services Produced in U.S. During a given period LO1 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved The National Economy Flow variable Amount per unit of time Stock variable Amount at a particular point in time LO1 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Economic Fluctuations and Growth Rise and fall of economic activity Business cycles Expansions: Output increases Contractions: Output decreases Depression Sharp reduction in output Lasts > 1 year High unemployment Recession Lasts > 6 months LO2 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Economic Fluctuations and Growth Business cycle Peak-to-trough-to-peak Contraction Between peak and trough Expansion Between trough and peak Longest 10 years (March 1991 to March 2001) LO2 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Leading Economic Indicators Leading economic indicators Predict a change in economy Recovery Downturn Coincident economic indicators Reflect changes as they occur Lagging economic indicators Follow changes in economy LO2 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Aggregate Demand; Aggregate Supply Aggregate output Total amount of goods and services Produced in economy Given period Real GDP Aggregate demand Price level Quantity of aggregate output demanded LO3 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Aggregate Demand Curve Price level (2000 = 100) Exhibit 4 LO3 150 100 50 AD 0 Chapter 5 The quantity of aggregate output demanded is inversely related to the price level, other things constant. This inverse relationship is reflected by the aggregate demand curve AD. Real GDP 2 4 6 8 10 12 14 16 (trillions of 2000 dollars) Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Exhibit 5 LO3 Aggregate Demand and Aggregate Supply in 2008 Chapter 5 The total output of the economy and its price level are determined at the intersection of the Ad and AS curves. This point reflects real GDP and the price level for 2008 using 2000 as the base year. Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Equilibrium AD curve intersects AS curve Equilibrium price level Equilibrium real GDP Higher real GDP More goods and services Higher employment LO3 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Short History of the U.S. Economy 1. 2. 3. 4. Before and during Great Depression After Great Depression to early 1970s The Age of Keynes From early 1970s to early 1980s Stagflation Since early 1980s LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved The Great Depression and Before 1873 – 1879: Longest contraction 80 railroads – bankrupt 1890s Contractions 18% unemployment rate 1929: The Great Depression LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved The Great Depression and Before 1929 - 1933: Deepest economic contraction Stock market crashed; Investment dropped Consumer spending fell; Banks failed Money supply dropped by 1/3 High tariffs – restricted trade Big decline in AD Real GDP dropped 27% Price level dropped 26% Unemployment rate 33% LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO4 Exhibit 6 The Decrease in Aggregate Demand from 1929 to 1933 Price level (2000 = 100) AS 12.0 8.9 AD1929 AD1933 0 Chapter 5 The Great Depression of the 1930s can be represented by the shift to the left of the AD curve, from AD1929 to AD1933. In the resulting depression, real GDP fell from $865 billion to $636 billion, and the price level dropped from 11.9 to 8.9, measured relative to a price level of 100 in the base year 2000. Real GDP 636 865 (billions of 2000 dollars) Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved The Age of Keynes After the Great Depression to early 1970s 1936 John Maynard Keynes The General Theory of Employment, Interest, and Money AD – inherently unstable Government - increase AD Expansionary fiscal policy Increase government spending Cut taxes Federal budget deficit LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Stagflation: 1973 to 1980 1970 Inflation rate: 5.3% 1971 Ceilings: prices, wages 1973 Crop failures Soaring grain prices OPEC cut oil supply Increased oil prices LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Exhibit 7 LO4 Stagflation from 1973 to 1975 Price level (2000 = 100) AS1975 AS1973 38.0 31.9 AD 0 Chapter 5 The stagflation of the mid1970s can be represented as a leftward shift of the AS curve from AS1973 to AS1975. Aggregate output fell from $4.34 trillion in 1973 to $4.31 trillion in 1975, for a decline of about $30 billion (stagnation). The price level rose from 31.9 to 38.0, for a growth of 19% (inflation). Real GDP 4.31 4.34 (trillions of 2000 dollars) Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Since 1980 Combat stagflation Increase AS Supply-side economics Lower price level Increase output Increase employment Through lower taxes LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Since 1980 1981: Recession Unemployment rate 10% Lower output Economic growth for 10 years Federal budget deficit 1990: higher taxes 1993: higher taxes 1995: slower growth in federal spending Lower federal deficits LO4 Chapter 5 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Since 1980 LO4 Chapter 5 1998: Federal budget surplus Longest expansion: 1991-2001 22 millions new jobs Unemployment rate 4.2% Modest inflation 2001: Recession (8 months) Slow recovery 2003, unemployment rate 6.3% Tax cuts Increased output Federal budget deficit December 2007: Recession 2.5 million jobs lost in 2008 2008 Federal deficit: $450 billion Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
