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Basics of Macroeconomics peak contraction recovery trough Dr. Dennis Foster Economics: A framework for understanding how we cope with scarcity. Micro – focus on individual/firm. Macro – focus on the overall economy. Macroeconomic problems Unemployment of resources. Economic growth is slow, sluggish, negative. Inflation. Why is Inflation a problem? Milton Friedman … Inflation is always and everywhere a monetary phenomenon. Who controls the money supply? The Federal Reserve System (the government!) Macroeconomic goals Full employment of resources. Sustained economic growth. Price stability. Business Cycles Macro goals are interrelated: peak Change in GDP over time. contraction recovery trough time line Employment high falling low rising Prices rising falling stable stable Growth stable negative stable high Business Cycles - Theories External shocks Population pressures [Malthus] Innovation [Schumpeter] Underconsumption [Marx] Erratic anomalies [Classical] Overproduction [Keynesian] Central banking [Austrian] Appendix: Macro Model of Economy Production Possibilities Frontier Tons of Wheat The Production Possibilities Curve A 120 B 1. What is the cost in going from A to B, B to C, C to D, et al.? 2. What is the cost in going from G to F, F to E, et al.? 3. What point is best? 4. What is wrong with H? 5. Can we produce at I? Can we consume there? I 100 C 80 H 60 D E 40 20 F G 0 25 35 41 46 49 50 Reference: Investopedia on the PPF: http://www.investopedia.com/terms/p/productionpossibilityfrontier.asp Gallons of Wine Production Possibilities Frontier What does it show us? Scarcity Choice Unemployment Economic growth What doesn’t it show us? What/How/For Whom to produce Inflation How variables are related (theory) Basics of Macroeconomics peak contraction recovery trough Dr. Dennis Foster