Introduction to Macroeconomics

Mini-Lecture # 1

William A. Branch

Outline

Contents
1

What is Macroeconomics?

Key Principles

This course...

What is Macroeconomics

What is Macroeconomics?
Macroeconomics is the study of economy-wide (aggregate) phenomena.
Example topics of interest:
output/income GDP
inflation
unemployment
monetary policy
fiscal policy
stock and bond markets
What are the big macroeconomic issues of the day?
Financial crisis and Great Recession 2007-2009.
Slow recovery.
Debt sustainability and austerity
Eurozone crisis.
What is the learning objective of Intro. Macro?
1. To become educated citizens on topics of macro:
to be able to assess important issues of the day.
to recognize how the macroeconomy affects your own decisions, such
as saving, planning, working, education, ...
2. Motivate/excite you to become an economics major!
How does macro differ from micro?
Definition 1. microeconomics is the study of how households and firms make decisions and how they interact in markets.
Definition 2. macroeconomics is the study of how economy-wide phenomena including inflation, unemployment and economic growth.
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Key Principles

Principle 1: A countrys standard of living depends on its ability to produce

goods and services.
Stark differences in living standards across poorest and richest.
Haiti: average annual income $ 726.
U.S.: average annual income $ 45,010.
What accounts for the difference? Productivity how much does a typical
worker actually produce.
Principle 2: Prices rise when the government produces too much money.
Zimbabwe: inflation went from 20% in 1997 to 6.5 sextillion % in 11/08.
What causes inflation?
Almost all persistent inflation is from growth in the qty. of money.
When govt creates large quantities of money, its value falls.
The value of money is what it can buy, so it is inversely related to the
price-level.
So when qty. of money goes up so does the price-level inflation.
Principle 3: Society faces a short-run tradeoff between inflation and unemployment.
In long-run, as money supply prices proportionally.
In short-run:
prices are slow to adjust, so when M the real purchasing power increases and it stimulates demand for goods and services.
Higher demand may cause firms to raise prices in time, but immediately
hire more workers to meet demand.
more hiring, lower unemployment.
But, at expense of some inflation.
This tradeoff is an important aspect of the business cycle.
3

Definition 3. business cycle: fluctuations in economic activity such as employment and production.
In the U.S. the Federal Reserve has a dual mandate from congress: maintain
price stability and full employment.
The tradeoff means that sometimes Fed has to choose which mandate to
meet. (Means some political opposition.)

This course...

This course...
The plan of this course:
1. How to measure and explain long-run economic growth.
2. How to measure prices and explain persistent inflation.
3. How to measure unemployment and explain persistent unemployment.
4. The financial system and its importance to the economy.
5. The short-run economy and macroeconomic stabilization policy.