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Introduction
Chapter 1
1
What is Macroeconomics?
Study of the aggregate behavior in an
economy
 Study of the determinants of price level,
output, and employment


Put less formally, macroeconomics is about
understanding the causes of prosperity and
poverty.
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Macroeconomics and policy
Recognition that the macroeconomy is
affected by government policy
 Purpose of policy: affect a desired outcome
 Policy may have undesirable consequences

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Key questions:
What determines the level of out output?
 What determines the level of employment?
 What determines the level of prices?

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Unemployment Rate
30%
20%
10%
0%
1930 35 40
45 50
55 60
65 70
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75 80
85 90
95
5
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
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12
10
8
Data
6
Sum of All civilian workers
Sum of Males
Sum of Females
4
2
0
Year or month
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Inflation
Rate
40%
20%
0%
-20% 31 36 41 46 51 56 61 66 71 76 81 86 91 96
Years
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-2.00%
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
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16.00%
14.00%
12.00%
10.00%
8.00%
Data
6.00%
Sum of CPI
Sum of Food
4.00%
Sum of Medical care
2.00%
0.00%
-4.00%
Year or month
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Business Cycle
0.2
0.15
0.1
0.05
80
65
35
-0.05
50
0
-0.1
-0.15
-0.2
-0.25
-0.3
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1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002: I
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Total

..\317-2003\real gdp.xls
8.00%
Business cycle
6.00%
4.00%
2.00%
Drop Series Fields Here
Total
0.00%
-2.00%
-4.00%
Year or quarter
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Historical perspective

Macroeconomics did not become a separate
discipline until the depression
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Events leading up to the
development of Macroeconomics

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Founding of the National Bureau of Economic
Research in the 1920s.
 Purpose: Collection and systemization of
economic data
 Led by Simon Kuznets, who developed national
income accounting
business cycles
Great Depression—laid the back drop for the work
of John Maynard Keynes
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J.M. Keynes (1883-1946)
Wrote the book The General Theory of
Employment, Interest, and Money
 Asserted that market economies are not self
adjusting
 Purpose: save capitalism

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Causes of the Depression
Keynes—collapse of aggregate demand
 Kindleberger—collapse of world trade, and
the lack of a global lender of last resort
 Friedman—depression resulted from
government intervention

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Macro over time
1930s—depression
 1940-45—WWII
 1945—1970 Golden Age of American
capitalism—low unemployment, low
inflation, high profits
 1964—Kennedy tax cut, first conscious
use of Keynesian economic theory
 Late 1960s—Vietnam

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1970s—rising inflation and rising
unemployment
 1974—4 fold increase in the price of oil
 Stagflation
 Rise of monetarism
 Propelled by the criticisms of M.
Friedman in particular
 Backdrop: rising inflation of the 1970s
 1979—Paul Volker appointed chair of the
Fed—followed monetarist prescriptions
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The Reagan 1980s
High unemployment, 13% inflation, 20%
interest rates
 Regan—abandons Keynesian demand
management policies
 Adopts supply-side economics
 Tight monetary policy combined with tax
cuts and rising military spending
 Result: large deficits

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The Clinton Years
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Booming economy combined with the end of the
cold war
Cuts in military expenditures combined with rising
tax revenues reduces deficit
Economy characterized by low inflation, low
unemployment, and government surpluses
Potential Problem: low savings rates and a
booming trade deficit, and a runaway stock market
Paradox: why is their no inflation
Globalization of the world economy
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The Bush Years
Terrorism and the economic impact
 Corporate scandals and the collapse in
confidence

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